Order Code RS20119
March 16, 1999
CRS Report for Congress
Received through the CRS Web
Telephone Excise Tax
Louis Alan Talley
Research Analyst in Taxation
Government and Finance Division
Summary
The federal excise tax on local and long distance telephone service produces
substantial revenues even at a tax rate of 3 percent. The Internal Revenue Service
reports that the tax reached a new record in collections of $4.9 billion in FY 1998. These
taxes go into the general receipts of the U.S. Treasury and are not dedicated to a trust
fund or any other special purpose. In the debate over whether the tax should be
repealed, interested parties have attributed a number of advantages and disadvantages
to the tax. Not only is the tax administratively easy for the federal government to collect,
but it also continues to generate large and stable amounts of revenue. Those who favor
the tax note that there is no serious evidence that the communications industry has been
injured by the past imposition of this tax. Among those opposed to the tax there is broad
consensus that this is a regressive tax. They stress that telephone usage should be
distinguished from the sumptuary (“sin”) excise taxes imposed on items such as alcoholic
beverages and tobacco. Opponents argue that the tax base is one which should be left
to the states, that without this tax the communications industry would grow more
rapidly, and that the economy would benefit from this expansion. This report will be
updated as events warrant.
Brief History
The federal excise tax on telephone calls (also knows as the communications tax)
originated on long distance service under the Spanish War Act of 1898. This original tax
attached when the call was valued at 15¢ or more. The tax was repealed in 1902 but
reenacted as a tax on a per-message basis under the Act of October 22, 1914.
Subsequently, the tax was repealed and reenacted several times. The federal tax on long
distance calls has been levied on a continuous basis since passage of the Revenue Bill of
1932. That law was passed largely because of the federal budget deficit which occurred
when income tax receipts declined because of the economic depression. The tax was
Congressional Research Service ˜ The Library of Congress

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extended to local telephone services a few months prior to the U.S. entrance into World
War II by the Revenue Act of 1941.
In the 1960s, 1970s, and 1980s, the federal telephone excise tax was repeatedly
imposed on a temporary basis. In general, the laws under which the tax operated called
for a gradual phase-down in the tax rate before total repeal of the tax. Often, revenue
problems surfaced before the repeal date and Congress responded by either increasing the
rate in effect, or continuing the rate but postponing repeal.
Prior to passage of the Revenue Reconciliation Act of 1990, the tax was scheduled
to expire on December 31, 1990. The 1990 Act permanently extended the tax at the 3
percent rate. The rationale for continuance was that budget deficits precluded allowing
the tax to expire.
Revenues
The revenue from the telephone excise tax goes into the general receipts of the
United States Treasury. It is used for general government expenditures as they accrue.
It is not earmarked for any particular government function or service. The tax produces
substantial and stable amounts of revenue. A table that provides annual telephone excise
tax collections since fiscal year 1980 appears on the final page of this report.
Assessment
In the continuing debate over whether the federal excise tax on telephone service
should be repealed, interested parties have attributed a number of advantages and
disadvantages to the tax. Following is a brief discussion of some of the issues associated
with proposed repeal of the tax: the incidence, revenue needs, federal-state revenue
competition, communication industry effects, and administrative collection ease.
Incidence
Excise taxes are labeled as regressive taxes to the extent that low-income people
spend a higher fraction of their income on the taxed item than high-income people.
Opponents of the telephone excise tax find regressivity to be an objectionable feature not
only of the telephone tax borne directly by consumers, but also of the telephone excise
taxes paid by businesses, to the extent that tax burdens are shifted forward to consumers.
A 1987 study by the Congressional Budget Office, The Distributional Effects of an
Increase in Selected Federal Excise Taxes, concluded that among excises, those on
alcoholic beverages and tobacco products would have less of an impact upon low-income
families than those on telephone service. It was noted tha
1
t the telephone excise tax would
be accessed on nearly all low-income families (since 94 percent of households had
telephone service in 1998), while taxes on alcoholic beverages and tobacco products show
U.S.
1
Congressional Budget Office. The Distributional Effects of an Increase in Selected Federal
Excise Taxes. Staff working paper. [Washington] January 1987.

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that they impact only about a third of families with incomes less than $10,000 (since not
everyone drinks alcoholic beverages or smokes).
Those who oppose repeal of the telephone excise tax argue that the entire federal tax
structure, rather than its individual parts, should be examined and that the system as a
whole is not regressive. It is noted that the regressive telephone excise tax can be offset
by progressive rates on federal personal income taxes. Additionally, proponents of the tax
on telephone service argue that the tax on telephone service treats equally families who use
the telephone equally.
As a result of the deregulation of the telephone system, costs for local telephone
service have risen in many areas. In addition, there has been a proliferation of charges on
telephone services. Some have called for a revision of the federal excise tax as a means
2
of helping lower-income persons retain their telephone service by subsidizing the telephone
usage of the poor. That is, if this excise tax is to remain part of the tax structure, either
low-income persons should be exempted from the tax or a trust fund be set up with
revenues from the tax to help defray the cost of telephone service for the poor (See H.R.
727, 106 Congress, discussed in this report’s section on
th
Legislation).3
Revenue Needs
Perhaps the principal argument used in recent years for continuation of the tax was
the need for revenues in order to reduce federal budget deficits. Proponents argued that
the federal tax on telephone service cannot be evaluated in a vacuum, but needs to be
considered in the overall federal budgetary situation. In addition, proponents noted that
a reduction in exemptions for either types of services (such as installation charges) or types
of organizations exempted (nonprofit hospitals, educational organizations, federal and
foreign governments, etc.) from the communications excise tax could easily generate large
additional amounts of revenue. While there are no longer annual federal budget deficits,
4
some argue that tax cuts are not justified and that the surplus should be used to reduce the
federal debt accumulated over many prior years of federal budget deficits.
Opponents of the tax concede that the elimination of the federal telephone tax would
have an adverse effect on governmental receipts, but state that this objection does not
begin to outweigh the many benefits that such a repeal would bring. Some opposed to the
tax welcome the prospect of a modest tax cut; others state that the government could
make up for this tax loss in many other ways--by tax reforms such as the elimination of
“loopholes” or by reducing wasteful and nonessential government expenditures, to mention
just two alternatives.
2These other charges are not covered by this report. For information on telephone charges see
Telephone Bills: Charges on Local Telephone Bills. CRS Report RL30052, by James R. Riehl.
As
3
part of the federal universal service mandate, federal programs such as the Lifeline and Link-
Up programs provide low-income consumers assistance to hook up to and remain on the telephone
network.
U.S.
4
Department of Treasury. Office of Tax Analysis. Report to the Congress on Communication
Services Not Subject to Federal Excise Tax. August 1987. p. 28.

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Intergovernmental Relations
Those opposed to the federal telephone tax argue that this tax base could be left
entirely to the states. Proponents of reserving this revenue opportunity for the states argue
that this offers an excellent opportunity to reduce the trend toward centralization and
bureaucracy in Washington and to “turn back” to the states revenue sources together with
responsibilities for certain program areas.
Supporters of the federal tax say that there is no point in allowing this tax to be ceded
to the states at a time when revenues are still needed to reduce the federal debt. If the
federal excise tax is simply to be replaced by state levies, then this substitution negates the
arguments advanced by proponents of repealing the tax. Supporters of the tax note that
there is nothing preventing the states from levying the tax now and that many states
already levy taxes on telephone service. Those that support retaining the federal tax point
out that the arguments raised against the federal tax on such grounds as its regressiveness
and its unjust burden on the telephone user would also apply to taxes at the state level.
Communications Industry Effects
Opponents of the tax argue that the elimination of the federal telephone tax would
favorably affect the communications industry. While telephone companies do not bear this
tax directly, through backward tax shifting they bear some of the economic burden of the
tax. This burden is in the form of a reduction in both the number of subscribers and
amount of services requested, caused by higher cost due to the federal excise tax. It has
been additionally argued that placing an extra cost on telephone use discourages the
expansion and improvement of telephone service. In the future, traditional telephone
service may receive more competition from Internet telephony which is currently not
subject to either the federal telephone excise tax or Federal Communications Commission
(FCC) fees. Increased growth of the telephone industry, which elimination of the tax
would presumably bring, should be considered in terms both of the many independent
companies striving to make this industry more competitive and of the increased
communication needs of this country.
Proponents of the federal telephone tax (particularly at its historically low 3 percent
rate) argue that they have not seen an adverse effect on the growth of the communications
industry. Supporters of the tax also note that federal programs to assist low income
consumers gain access to and remain on the telephone network are in part supported
indirectly (since telephone taxes go into the general fund) from the revenues this tax
generates.
Administration
Those in favor of the tax note that the federal excise tax on telephone service has
administrative advantages. Because the telephone companies collect the tax from the
customers, the federal government is spared this expense. The administration of the tax
by the federal government is therefore much simplified. In addition, it is difficult for the
telephone user to evade payment of this tax. Those persons refusing to pay this tax are
easily identified and action can be taken against them.

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Opponents of the tax note that it is not the function of the telephone company to act
as the collection agent for largely "invisible" federal taxes. Further administrative costs
associated with collection are most likely passed forward and are borne by consumers
through higher charges for service.
Legislation
In the 105 Congress, Representatives Jennifer Dunn and Billy Tauzin introduce
th
d
H.R. 3648 as the “Tax on Talking Repeal Act of 1998” which called for the repeal of the
federal telephone tax. Representative Dunn serves on the House Ways and Means
Committee while Representative Tauzin serves on the Committee on Commerce as Chair
of the Subcommittee on Telecommunications, Trade and Consumer Protection. On the
Senate side, Commerce Committee Chairman John McCain announced at a meeting of the
Cellular Telecommunications Industry Association (February 23, 1998) that he promised
to seek repeal of the telephone excise tax. In introducing his bill, S. 1909, he noted that
implementation of the Telecommunications Act of 1996 (P.L. 104-104) created new
charges on consumers’ telephone bills and called for the repeal of the telephone excise tax
as an outdated and unnecessary old charge.
Other bills in the 105
th Congress called for the telephone tax revenues to be used for
other phone related purposes. Representative Klink’s bill, H.R. 4474, would establish a
Telecommunications Trust Fund to receive telephone tax revenues to support federal
universal service. Two other bills (Senator Burns’ bill S. 2348, Representative Tauzin’s
bill H.R. 4324) would use one third of the revenues for the E-rate program5 with the
remainder of the tax repealed.
In the 106 Congress, Senator McCain reintroduced his bill (S. 94) to repeal th
th
e
telephone excise tax. That bill has been referred to the Senate Finance Committee. In
contrast, H.R. 727 introduced by Representative Klink would retain the telephone tax and
dedicate all of its revenue to a telecommunications trust fund to support universal
telecommunications services. That bill was referred to the House Committee on
Commerce and the Committee on Ways and Means.
5For additional information see CRS Issue Brief 98040, Telecommunications Discounts for
Schools and Libraries: The “E-Rate” Program and Controversies, by Angele A. Gilroy.

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TABLE 1. Telephone Excise Tax Collections
Collections from
Telephone and
Rate of Tax
Teletype Service
Fiscal Year
(percent)
($ thousands)
1980
2%
$1,117,834
1981
2
998,503
1982
1
919,749
1983
3
1,048,317
1984
3
2,034,965
1985
3
2,307,607
1986
3
2,339,153
1987
3
2,522,062
1988
3
2,555,082
1989
3
2,266,000
1990
3
3,075,209
1991
3
2,952,522
1992
3
3,173,000
1993
3
3,351,600
1994
3
3,774,000
1995
3
3,825,700
1996
3
4,243,400
1997
3
4,706,800
1998
3
4,910,000
Note: During the 1960s and 1970s, the tax rate was as high as 10 percent.
Sources: For fiscal years 1980 to 1989 collection figures have been taken from appropriate Annual Reports
of the Commissioner of Internal Revenue published by the Department of the Treasury, Internal Revenue Service,
Publication 55.
For fiscal years 1990 and 1991 collection figures have been taken from appropriate information releases
entitled Internal Revenue Report of Excise Taxes.
For fiscal years 1992 to 1997 collection figures have been taken from the Statistics of Income Bulletin, issued
in Fall 1998 (Vol. 18, No. 2) published by the Internal Revenue Service.
For fiscal year 1998 the collection figure came from the U.S. Office of Management and Budget. Budget of
the United States Government, FY2000, Analytical Perspectives. February 1999. p. 90.

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