What's that 17% Tax on Your Cell Phone Bill?

The litany of calls, texts and data usage detailed on a cell phone bill is enough to make anyone’s head spin, but here’s the kicker: most of us are paying, on average, an extra 17.18% on each bill.

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According to the Tax Foundation, local, state and federal governments, along with other public entities like school districts and 911 systems add on taxes and surcharges to wireless bills that can add on average an additional 17.18% to the bill.

Experts say cell phone bills are often presented in a way that makes it difficult for consumers to sort out what they are being charged, and they often gloss over the added fees. But for cash-strapped consumers, these surcharges can really add up: an $80 cell phone bills jumps to $93.74.

Scott Drenkard, an economist at the Tax Foundation, says the added taxes from different levels of government highlights a jurisdiction problem with too many taxing authorities.

“It’s a lot easier to raise specific taxes than it is to raise broad-based taxes. When they try to raise the income tax, people rightfully come out and participate in public debate. But raising taxes on something like cigarettes, that is much easier because there are less stakeholders. Same logic applies to cell phone bills,    it’s only one product and only one lobbying group to fight.”

States with the Highest Taxes and Fees on Wireless Service

 (Combined Federal-State-Local Rate)

Nebraska: 24.49% Washington: 24.44% New York: 23.67% Florida: 22.41% Illinois: 21.76%

Source: Tax Foundation

Local charges make up an average 11.36% of the added taxes, and 26 states have average state and local wireless taxes and fees above 10%. Add in federal taxes, and some subscribers are paying more than 20% in taxes. Mobile subscribers in Nebraska face the highest federal-state-local average tax rate of 24.5%, and customers in Washington, New York, Florida, Illinois, Rhode Island and Missouri face taxes higher than 20%.

The Wireless Tax Fairness Act has been introduced in Congress again this year to help combat rising taxes and would impose a five-year freeze of new state and local taxes on cell phones and other wireless services. The bill was passed out of the House of Representatives last year, but stalled in the Senate.

“The industry is good bill collectors, I understand why states like the relationship with us, but we shouldn’t bear this unique taxing burden,” says Jot Carpenter, vice president, government affairs at telecom industry association CTIA. “All we want is the same basic level sales tax to apply to our product like it does to virtually every other product."

He points to the monopoly American Bell Telephone Company (Ma Bell) once had over the telecom industry as a reason so many taxing authorities look to “hide taxes without the political backlash.”

“Back then it was a monopoly, it didn’t matter how many taxes the government added, consumers had nowhere to go, and if they did get mad, they got mad at the company.” He adds that in the early days of wireless, there was a perception that connection was a luxury that only rich people could afford.

“Now 35% of the population is wireless only, and in some states, it’s north of 40%. It’s a pervasive consumer good and if we make it artificially more expensive to connect to the modern economy you are raising costs for every business in America.”

To help the Wireless Tax Fairness Act gain momentum, Carpenter says the CTIA, which is a major supporter of the legislation, is working to get a majority of bipartisan Representatives to co-sign and pass the bill.

Even consumers living in states without a sales tax still get pinched on their cell phone bills. Alaskans might avoid sales taxes, but they pay a 17.9% tax rate on their wireless bills.

While consumers might not be able to do much to avoid paying surcharges on their cell phone services, there are ways they can trim back other areas of their bill to help mitigate the blow:

Only Get What You Need Scott Gamm, author of More Money Please…, says consumers tend to be complacent with their cell phone bills, and that’s a mistake.

He suggests users actively review each billing statement for their usage to make sure they aren’t overpaying for a plan they don’t use in its entirety. He says there are many online sites, including Billshrink, that allow customers to enter in how many minutes they use, data necessary and what they want from a phone and it will find the best deals and carriers at the cheapest price.

Negotiate: Gamm urges customers to call their carriers and voice any billing issues or concerns.

“Tell them you aren’t happy with what you are being charged and ask for deals. It can make sense to cancel -- you will have to pay a fee -- but if you can find another carrier, the savings to switching to a new plan over six months might more than cover the cancellation fee.”

Text Smart: “When you calculate the cost per text, it is the most expensive form of communication,” says Gamm. Which is why he suggests all users review how often they text and whether getting an unlimited plan makes financial sense. “In my experience, this tends to be the best way to go for most people.”

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