Florida’s Cell Phone Tax Cut Could Help Reduce the Digital Divide

Governor Rick Scott (R-FL) is asking the Florida legislature to cut $470 million in taxes that the state collects from residents on their cell phone, satellite, and television bills. This proposal to cut the cellphone and TV tax rate by 3.6 percentage points will not only put money back into the pockets of everyday Floridians, but it is also a positive step in the right direction to help reduce Florida’s digital divide and will enable more innovation though mobile broadband.

Florida has one of the highest tax rates for wireless services (16.59 percent), falling behind only Washington, Nebraska and New York. In fact, consumers in seven states—Washington, Nebraska, Rhode Island, New York, Illinois, Missouri, and Florida—pay in excess of 20 percent of their bills for their combined state and federal tax rates.

So why have these taxes to begin with? States have traditionally turned to taxing services that people consume in their home because it is a reliable form of revenue. Someone in Florida cannot travel to Georgia to get a lower tax rate on their cell phone bill like they could for purchases of goods that include sales tax. This reliable revenue stream has also led these services to be taxed more heavily than other goods or services. However, while these high taxes may have made sense once when the main telecommunications service consumed by people was the traditional telephone, it certainly makes no sense for telecommunications services—like wireless services—which have become key drivers of today’s digital economy.

Excessive wireless tax rates impede the digital economy and have a perverse effect on wireless consumption. While taxes on cell phones and other wireless services may not necessarily impact a consumer’s decision whether to buy a device, it does affect his or her consumption of wireless services. Indeed, individuals in states like Florida that face higher taxes are more inclined to purchase plans with fewer minutes or services. For example, one study found that for every dollar of additional tax reduce levied against the average U.S. consumer’s cellular bill, economic welfare fell by between $1.23 and $1.95. Basically, an increase on taxes for cellular services leads to a drop in spending for services on those devices.

These effects also tend to be regressive, affecting more middle to low income families than taxes on fixed broadband. Because high-income Americans are more likely than low-income Americans to purchase fixed broadband services, and low-income households are almost as likely to purchase wireless service as higher income households, taxes on wireless services tend to affect lower-income Americans more than some other kinds of taxes. For example, while mobile phone adoption in 2012 was 77 percent for households making under $25,000 a year, only 57 percent of these households had a computer at home. Compare this to households making over $100,000, 96 percent of which used mobile phones and 97 percent used home computers. Therefore, these regressive taxes have a disproportionate impact on low income households, playing a role in limiting adoption and increasing the digital divide.

It is important to note that this issue is not only about cutting taxes, as it is possible for this type of tax cut to be done in a budget neutral way to maintain state revenues by increasing taxes on less innovation-friendly services. The fact is that this type of taxation distorts the market in harmful, anti-innovation, and often discriminatory ways. By removing excessive and discriminatory taxes on wireless services, states like Florida can ensure that a larger share of citizens is fully participating in the digital economy. Moreover, more mobile broadband subscribers would likely lead to a virtuous cycle where data-intensive applications become more commercially-viable, which would in turn create better services and generate more adoption.

By reducing Florida’s state wireless tax, Governor Scott’s plan will increase consumption of and access to of wireless and television services for Florida’s low-income households. This tax cut is estimated to save the average family approximately $43 a year (assuming they pay $100 per month for these services). That is a sizable chuck of change back in the pockets of Floridians, who can use it to purchase more minutes or better wireless and television services. It is time for Florida to pass this plan, and for other states with high wireless tax rates—such as Washington State and Nebraska—to look to its example for how to reduce their burden on the digital economy and bridge the digital divide.