Eliminating State Telecom Equipment Taxes Will Spur Economic Development

October 02, 2013

Broadband is today’s engine driving economic development and job creation.  Data centers, application developers, rural healthcare providers, distance learning programs and local education providers, smart-grids, and other technology-based enterprises are all dependent upon broadband connectivity.  The nation’s broadband providers are the 21st century key to supplying the rest of the economy with what it needs to grow and to produce jobs.  Many states, however, maintain outdated tax policies that have failed to keep pace with today’s economic realities.  In 28 states, sales taxes on the purchase of broadband equipment are diverting resources that otherwise could be invested in network deployment and leading to faster speeds, more coverage, and higher capacity.  As the country is plodding along the road to economic recovery, policymakers are considering creating or expanding subsidy programs to provide various incentives for broadband providers to expand their networks.  The easiest approach that would have the most immediate and potent kick-start to job creation at the least administrative cost would be to update state tax policies by exempting the wholesale purchase of broadband telecommunications network equipment.
Since the inception of the sales tax, a number of states recognized that sales taxes should be imposed on final consumption, not on business inputs.  As a result, many state and local governments exempted the purchase of manufacturing equipment, farming implements, and raw materials used to churn out finished products. The theory behind these tax exemptions was that as tax was levied and collected on sales of finished products to the final consumer, such exemptions were necessary in order to prevent the “pyramiding” of taxes as a product or good moved through the production process.  This eliminated hidden taxes on consumers, avoided higher prices and led to a more efficient use of capital resources.  Ultimately, the economic growth and consumer benefits more than made up for the loss of revenue in the production process.  

Unfortunately, the majority of the laws written in the last century were not crafted with broadband and other telecommunications technologies in mind.  Although a few states such as Iowa, North Dakota, Utah, and most recently Texas, have modified their laws to eliminate the sales tax on wholesale telecommunications equipment, the majority of states have not addressed this impediment to economic development for the 21st century. Today, 28 states continue to impose sales taxes on wholesale telecommunications equipment purchases. Notably, most of those states take a different approach when it comes to manufacturing whereby they exempt equipment used in the production process from sales tax.
For states where broadband telecommunications equipment is exempt from tax, broadband service providers are able to make their investment dollars go further by having every dollar invested result in a dollar of equipment purchased.  In a state such as Washington that taxes broadband telecommunications equipment, by contrast, each dollar purchases less than $0.92 of telecommunications equipment, diverting a potential $55 million annually away from broadband network deployment.  This means those state’s residents lose by virtue of telecommunications providers having a less robust broadband telecommunications network.  Nationwide, the sales tax burden on telecommunications equipment is nearly $1.5 billion.  Not only are the network providers not investing the resources that are being taxed, but also consumers are paying the increased cost as hidden taxes built into their broadband telecommunications service rates.

A recent study by the Broadband Tax Institute estimates that a nationwide elimination of the sales tax on telecommunications network equipment would have substantial economic benefits.  The study considered the real impact in states where this equipment was previously taxed and then exempted by a change in state law.  The study estimates a nationwide exemption would generate $7.24 billion in additional annual GDP in the first year after the increase in investment and $33.13 billion of output over three years.  In addition, 53,000 new jobs would be created in the first year after the increase in investment and 243,000 over three years.  And broadband deployment would increase by 634,000 new connections in the short term.

We understand the drive for state revenue given the tough economic times we have been through.  The irony, though, is that while sales taxes might decrease immediately after a new broadband telecommunications sale tax exemption is passed into law, any lost short-term revenues will be offset by consumers paying more taxes on the increased number of taxable network connections and through the taxation of secondary economic activity.  Political realities can make this otherwise obvious decision difficult.  As most state legislators are up for re-election every two years, the prospect of passing a law that could have short-term negative consequences on important constituencies is seen as a path to a quick exit.  Nevertheless, although we often prod our representatives in Congress and our President to solve economic problems and to lead our nation’s economic policies, we also need to ask our state leaders to step up and consider making important political decisions that over the longer term generate jobs and economic growth as well as help prevent a slow-down of our economic recovery. 

We ask state policy makers to consider a long-term economic policy change by exempting telecommunications equipment from sales taxes.  It is economically indefensible and short-sighted to continue providing favorable treatment to manufacturers while unfairly burdening broadband telecommunications providers, who are a critical and indispensible element of economic growth in the 21st century.