Order Code RL30553
CRS Report for Congress
Received through the CRS Web
The Federal Excise Tax on Telephone Service:
A History
Updated January 4, 2001
Louis Alan Talley
Specialist in Taxation
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Federal Excise Tax on Telephone Service: A History
Summary
The federal excise tax on telephone service applies equally to general and toll
(local and long-distance) telephone service. The tax is levied at a 3 percent rate and
is a permanent part of our revenue structure.
The tax was first imposed in 1898 because of revenue needs brought about by
the Spanish-American War. This initial tax of 1 cent for calls costing more than 15
cents applied only to long-distance service and was repealed in 1902. Revenue needs
to prepare for World War I saw the reintroduction of the tax in 1914. The tax rate
was increased at the time America entered the first world war. It was not until 1924
that the tax was again repealed.
A depression reduced federal government receipts and led to the reintroduction
of the tax in 1932. In 1941, just before America entered World War II, rates were
increased and the tax was extended so that it also applied to local telephone service
for the first time. During the war, tax rates rose to 15% on local telephone service
and 25% on long distance service when the charge was more than 24 cents.
Telephone taxes have been continuously collected since this period.
A review of federal excises in 1965 brought about a reduction in the tax rate and
a scheduled date for elimination in 1969. However, revenue needs resulting from the
Vietnam conflict not only caused extension of the tax but resulted in higher tax rates.
Large budget deficits in the 1970s, 1980s, and 1990s resulted in repeated extensions
and postponement of the tax’s repeal. In 1990 the tax became a permanent part of
the federal revenue structure at a 3 percent tax rate.
In the prior Congress, the House of Representatives passed legislation twice to
repeal the tax. Under the House passed bill (H.R. 3916) the tax would be reduced
from 3 to 2 percent, starting 30 days after enactment. Then the tax could decline to
1 percent on October 1, 2001. The tax would be completely repealed on October 1,
2002. On September 14, 2000, the House of Representatives included an immediate
repeal of the tax in a package of spending and tax bills (H.R. 4516). The House bill
was folded into the fiscal 2001 appropriations bill for the legislative branch, the
Treasury Department and the U.S. Postal Service. After passage by the Congress, the
bill was vetoed by President Clinton. Any additional changes made to the tax will be
reflected in an updated report.

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Contents
Spanish-American War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Prelude to World War I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
World War I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Great Depression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
World War II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Codification of the Internal Revenue Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Vietnam Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
List of Tables
Table 1. Brief Legislative History of the Telephone Excise Tax . . . . . . . . . . . . . 7

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The Federal Excise Tax on Telephone Service: A
History
It is a popular but erroneous belief that the federal excise tax on telephone
service1¢is earmarked for defense spending. In fact, the revenues that flow from this
tax go into the General Fund of the United States and are used to pay for general
government expenditures–whether for national defense or for non-defense programs.
However, there are reasons why this erroneous belief developed. The history of the
telephone excise tax shows that it has been enacted primarily at times when our
national defense requirements have sharply increased–such as during the Spanish-
American War, World Wars I and II, and when our military commitments intensified
during the Vietnam conflict.
This report traces the history of the federal excise tax on telephone service from
1898 to the present. The public laws/federal legislation addressing the tax are listed
and summarized in Table 1 at the end of this report. The text provides the historical
context for the major legislation affecting the telephone excise tax. The history shows
that the tax has been intermittent. Over the last century, the tax has changed many
times and in many ways.
Spanish-American War
In late April 1898, Congress passed a resolution declaring that a state of war had
existed since April 21, 1898, between the United States and Spain. Although the
Spanish-American War was short, its financing needs resulted in a federal budget
deficit. In the landmark case Pollock v. Farmers Loan and Trust Company the
Supreme Court had nullified the income tax of 1894. Many in Congress felt that tariff
increases could create too much disturbance with industry. As a result, the leaders
in Congress felt that the revenues required for military expenditures either should
come from increases in existing domestic taxes or supplements of new taxes of the
same type. Thus, an excise tax on telephone service was introduced for the first time
in 1898.2 The tax remained in place until it was repealed in 1902.
Prelude to World War I
In August 1914, war broke out in Europe resulting in a precipitous fall in imports
to the United States from Europe. One result from the fall in imports was that
1 26 United States Code ¶ 4251.
2 30 Statutes at Large 460 [Public Law 55-133.]

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business profits were reduced, and revenues from the corporation income tax
declined. This fall in imports also reduced the federal government’s customs receipts.
On September 4, 1914, President Wilson called upon Congress to raise an additional
$100 million through “internal” taxes (in contrast to customs duties). These revenues
were needed not only because of the loss of revenues but also because of added
federal spending related to the war being fought in Europe.3 In response, Congress
passed H.R. 188914 commonly known as the Emergency Internal Revenue Tax Act
of 1914.5 The Act was mostly a renewal of the excises contained in the Spanish-
American War Revenue Act. It included a tax of 1 cent for telephone calls costing
more than 15 cents.6 The taxes instituted under this Act were initially set to expire
on December 31, 1915. However, on December 17, 1915, Congress passed a joint
resolution7 that continued the taxes instituted in 1914 “in full force and effect until and
including December thirty-first, nineteen hundred and sixteen.”8 After that time, while
revenue needs continued (for “preparedness”), the Revenue Act of September 19169
did not extend the tax on telephone service.10
3 Congress appropriated monies to bring home stranded Americans and to establish a war-risk
insurance bureau for American businesses.
4 An Act to increase the internal revenue, and for other purposes.
5 38 Statutes at Large 761. [Public, No. 217.]
6 Telegraph and telephone messages: It shall be the duty of every person, firm, or corporation
owning or operating any telegraph or telephone line or liens to make within thirty days after
the expiration of each month a sworn statement to the collector of internal revenue in each of
their respective districts, stating the number of dispatches, messages, or conversations
originated at each of their respective exchanges, toll stations, or offices, and transmitted
thence over their lines during the preceding month for which a charge of 15 cents or more was
imposed, and for reach of such messages or conversations the said person, firm, or
corporation shall collect from the persons paying for the message or conversation a tax of 1
cent in addition to the regular charges for the message or conversation, which tax the said
person, firm, or corporation shall in turn pay to the said collector of internal revenue of their
respective districts: Provided, That only one payments of said tax shall be required,
notwithstanding the lines of one or more persons, firms, or corporations shall be used for the
transmission of each of said messages or conversations: Provided further, That the messages
or dispatches of the officers and employees of any telegraph or telephone company concerning
the affairs and service of the company, and like messages or dispatches of the officials and
employees of railroad companies sent over the wires on their respective railroads shall be
exempt from this requirement: And provided further, That messages of officers and employees
of the Government on official business shall be exempt from the taxes herein imposed upon
telegraphic and telephonic messages.
7 H.J. Res. 59 [Pub. Res., No. 2].
8 39 Statutes at Large 2. [Pub. Res., No.2.]
9 39 Statutes at Large 792. [Public, No. 271].
10 The tax law for individuals was completely rewritten, and the first permanent estate tax, the
first war-profits tax, and the first tax on corporation capital stock were all included in the law.

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World War I
With the entrance of the United States into World War I, revenue needs were
greatly increased. Both parties worked together to produce a tax bill. Included in the
War Revenue Act of October 3, 1917 was a tax of “5 cents upon each telegraph,
telephone, or radio, dispatch, message, or conversation, which originates within the
United States, and for the transmission of which a charge of 15 cents or more is
imposed.”11 Work on the Revenue Act of 191812 had nearly been completed when the
Armistice was signed on November 11, 1918. Although World War I had ended,
Congress recognized budget expenditures could be expected to decline in the long
term but that reductions in expenditures would not occur in the short term. Pay for
our military forces could be expected to continue for some time and there was a need
to provide capital for reconstruction to our allies in Europe. Thus, this tax measure
was redrafted. The redrafted Act not only continued the telephone excise tax but did
so at increased rates that were graduated for the first time.13 While this Act is referred
to as the Revenue Act of 1918, it was not passed until early in 1919. The tax
continued until it was repealed in 1924.
The Great Depression
Today’s current telephone tax, derives from the Revenue Bill of 1932. Since
then, it has been reauthorized 29 times. The 1932 Act was passed in response to a
federal budget deficit brought about because of a decline in income tax receipts
caused by an economic depression rather than as a result of war. Initially the tax was
levied only on interstate (long-distance) service. The telephone excise tax was
extended five times (between 1933 and 1941) before the tax was first applied to local
telephone service.
11 40 Statutes at Large 300. [Public, No. 50.]
12 40 Statutes at Large 1057. [Public, No. 254.] The law became effective February 24,
1919.
13 In the case of each telegraph, telephone, cable, or radio, dispatch, message, or conversation,
which originates on or after such date within the United States, and for the transmission of
which the charge is more than 14 cents and not more than 50 cents, a tax of 5 cents; and if the
charge is more than 50 cents, a tax of 10 cents: Provided, That only one payment of such tax
shall be required, not-withstanding the lines or stations of one or more persons are used for
the transmission of such dispatch, message, or conversation; and (g) a tax equivalent to 10 per
centum of the amount paid after such date to any telegraph or telephone company for any
leased wire or talking circuit special service furnished after such date. This subdivision shall
not apply to the amount paid for so much of such service as is utilized (1) in the collection and
dissemination of news through the public press, or (2) in the conduct, by a common carrier
or telegraph or telephone company, of its business as such.

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World War II
Just prior to the entrance of the United States into World War II, the Revenue
Act of 194114 was passed into law. In addition to increasing the rate on long distance
calls, it also imposed the tax on “general” or local telephone service for the first time.
The rate of tax for local telephone service was set at 6 percent of the amount paid by
subscribers while that for long distance calls was set at 5 cents for each 50 cents or
fraction thereof, if the cost of the message was greater than 24 cents. Other
legislation was subsequently enacted during World War II–the Revenue Act of 194215
and the Revenue Act of 1943.16 The tax rates on telephone service reached their all
time high under provisions of the Revenue Act of 1943.17 Rates were 15 percent on
local telephone calls and 25 percent (on messages which cost more than 24 cents) on
long distance calls. The Revenue Act of 1943 also provided for the increased excise
tax rates to expire. In the case of the excise taxes on telephone service, the law
provided that the increased rates would end six months after the “date of termination
of hostilities in the present war.” The law defined the termination date as that date
proclaimed by either the President or the date specified in a concurrent resolution of
the two Houses of Congress, whichever is the earlier. In a reversal of this position,
the Excise Tax Act of 194718 continued the rates indefinitely.
Codification of the Internal Revenue Code
With the revision of the Internal Revenue Code of 195419 the levies imposed on
both local and long distance calls (for messages costing more than 24 cents) were
reduced. In the case of local calls the rate was reduced from 15 percent to 10
percent and on long distance calls the rate was reduced from 15 percent to 10 percent.
The Excise Tax Technical Changes Act of 195820 made no changes in the tax rate on
telephone calls but did remove the 24 cents limitation first provided for in 1942. As
such, both local and long-distance calling were subject to the same tax rate for the
first time. Prior to passage of this act, the terminology of the tax was somewhat
different. What is now called a tax on general telephone service was then known as
a tax on local telephone service, and what is now called a tax on toll telephone service
was known as a tax on long distance telephone service.
14 55 Statutes at Large 714. [Public Law 77-250.]
15 56 Statutes at Large 975. [Public Law 77-753.]
16 58 Statutes at Large 61. [Public Law 78-235.]
17 While called the Revenue Act of 1943 the legislation was not passed into law until 1944.
18 61 Statutes at Large 12. [Public Law 80-17.]
19 68A Statutes at Large 503. [Public Law 83-591.]
20 72 Statutes at Large 1289. [Public Law 85-859.]

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The Tax Rate Extension Act of 195921 provided for the termination of the tax on
local telephone service on July 1, 1960. However, a series of one-year extensions22
was subsequently enacted23 each year until 1965 when the Excise Tax Reduction Act24
became law. In 1965 Congress enacted comprehensive legislation which repealed
many existing federal excise taxes and authorized the reduction, and in some
instances, the gradual reduction and ultimate repeal of other excises over a period of
years. This act authorized the reduction of the 10 percent tax on local and long
distance telephone service to 3 percent which became effective on January 1, 1966.
In addition to the reduced rate, the act provided for the gradual reduction and
elimination of the tax on January 1, 1969.
Vietnam Conflict
By 1966, however, the federal government’s revenue requirements had increased
due to acceleration of the Vietnam conflict. President Johnson requested that
Congress enact legislation to restore the rate of the telephone excise tax to the 10
percent rate in effect prior to January 1, 1966, and that successive reductions which
had been authorized by the Excise Tax Reduction Act of 1965 be deferred.
Accordingly, Congress enacted the Tax Adjustment Act of 196625. That act
authorized the restoration of the former 10 percent rate on these services beginning
on April 1, 1966, for a two-year period (until April 1, 1968), at which time it was to
be reduced to 1 percent, before repeal on January 1, 1969. Representative Wilbur D.
Mills, then Chairman of the House Committee on Ways and Means, made the
following statement during House Committee on Appropriations hearings on the
Department of Treasury and Post Office and Executive Office of the President
Appropriations for 1968: “It is clear that Vietnam and only the Vietnam operation
makes this bill necessary” (page 547).
Again in 1967 President Johnson urged postponement of scheduled reductions
in telephone excise taxes as part of his tax program designed to meet the rising cost
of the Vietnam conflict and increasing domestic needs. A Joint Congressional
Resolution was approved which temporarily extended the 10 percent rate from March
31, 1968 until April 30, 1968. This temporary extension provided Congress time to
complete action on the Revenue and Expenditure Control Act of 1968.26 The 1968
act continued the 10 percent tax retroactively from April 30, 1968, until December
21 73 Statutes at Large 158. [Public Law 86-75.]
22 President Eisenhower in his budget messages of 1960 and 1961 recommended
extension of the telephone excise tax.
23 The following one-year extensions of the tax were enacted: to July 1, 1961 by Public Law
86-564; to July 1, 1962 by Public Law 87-72; to July 1, 1963 by Public Law 87-50, to July
1, 1964 by Public Law 88-52; and to July 1, 1965 by Public Law 88-348.
24 79 Statutes at Large 136. [Public Law 89-44.]
25 80 Statutes at Large 66. [Public Law 89-368.]
26 82 Statutes at Large 265. [Public Law 90-364.]

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31, 1969, with provision for its subsequent reduction and repeal by calendar year
1973.
Passage of the Tax Reform Act of 196927 again granted a one-year extension (this
time until December 31, 1970) of the telephone tax at the rate of 10 percent. With
passage of the Excise, Estate and Gift Tax Adjustment Act of 197028 the 10 percent
rate was extended through calendar years 1971 and 1972. The tax was then to be
reduced by 1 percent each year until the tax was scheduled for repeal on January 1,
1982. However, prior to repeal, the tax was extended in 1980 at a 2 percent rate until
1982 when it was scheduled to be reduced to 1 percent before repeal in 1983.29 In
1981 the tax was extended again. This time the tax was extended at the 1 percent rate
for two additional years with repeal scheduled for 1985.30 However, the following
year, 1982, the tax was increased to a 3 percent rate, with repeal rescheduled for the
beginning of calendar year 1986.31
In April 1984 both the House of Representatives and the Senate passed
legislation calling for a continuation of the current excise tax on telephone service at
a 3 percent rate for an additional two years. The legislation enacted provided for
repeal in 1988.32 However, before repeal the tax was again extended at the 3 percent
rate this time for an additional three years.33 During this period, the Office of Tax
Analysis of the U.S. Department of Treasury issued a report (August 1987). The
report concluded that the communications excise tax caused economic distortions
and inequities between households and that there was no policy rationale for retaining
the tax. The report also suggested three alternatives to the private communication
service exemption if the tax were to be extended, since current law created differential
tax treatment of private and nonprivate communication services. In the report, there
was a call for modifying or repealing some of the exemptions of current law (if the tax
was to be extended), since the exemptions had not been reviewed in recent years.
President Bush submitted his budget proposal for FY1991 on January 29, 1990.
That proposal called for the permanent extension of the telephone excise tax at the
prevailing rate of 3%. Since the tax had been a continuous revenue source since 1932
and because of large continuing budget deficits, Congress concurred with the
President’s recommendation and made the tax a permanent part of our tax revenue
structure with the enactment of the Revenue Reconciliation Act of 1990.34
27 83 Statutes at Large 660. [Public Law 91-172.]
28 84 Statutes at Large 1843. [Public Law 91-614.]
29 94 Statutes at Large 2694. [Public Law 96-499.]
30 95 Statutes at Large 351. [Public Law 97-34.]
31 96 Statutes at Large 568. [Public Law 97-248.]
32 98 Statutes at Large 507. [Public Law 98-369.]
33 101 Statutes at Large 1330-438. [Public Law 100-203.]
34 104 Statutes at Large 1388-437. [Public Law 101-508.]

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Legislative interest was shown during the prior Congress for repeal of the
telephone excise tax. First, the House of Representatives voted 420-2 to a phased-out
repeal of the tax in H.R. 3916. Under this House passed bill, the excise tax would
decline from 3 percent to 2 percent, starting 30 days after enactment until October 1,
2001, when it would decline to 1 percent. The tax would be completely repealed as
of October 1, 2002. The Senate Finance Committee substituted language to H.R.
3916. Under the Committee’s substitute language, total repeal of the tax would occur
for bills rendered after August 31, 2000. Also included in the Finance Committee’s
bill was a requirement that the General Accounting Office (in consultation with the
Federal Communications Commission) report to the committees of jurisdiction the
amount of repealed communications taxes passed on to residential and business
consumers.
On September 14, 2000, the House of Representatives–for a second time–took
up legislation which included the repeal of the telephone excise tax. Under provisions
contained in H.R. 4516, which was a package of both spending and tax bills, the 3%
tax on communication services would be immediately repealed. After passage by the
Congress, President Clinton vetoed this legislation.
Table 1. Brief Legislative History of the Telephone Excise Tax
Year
P.L. Number
Tax on General (Local)
Tax on Toll (Long Distance)
Telephone Service
Telephone Service
1898
P.L. 55-133
No Tax
1¢ if message is 15¢ or more
1902
P.L. 57-67
No Tax
Tax repealed
1914
P.L. 63-217
No Tax
1¢ if message is 15¢ or more.
Effective date through
12/31/15
1915
Pub. Res., No. 2
No Tax
Extension of tax through
12/31/16
1916
P.L. 64-271
No Tax
Tax expired
1917
P.L. 65-50
No Tax
5¢ if message is 15¢ or more
1919
P.L. 65-254
No Tax
5¢ if message is over 14¢ and
no more than 50¢; 10¢ if
more than 50¢; 10% on leased
wire or talking circuit special
service
1921
P.L. 67-98
No Tax
Rates unchanged from prior
law. Changes made in
exemptions
1924
P.L. 68-176
No Tax
Tax repealed

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Year
P.L. Number
Tax on General (Local)
Tax on Toll (Long Distance)
Telephone Service
Telephone Service
1932
P.L. 154
No Tax
10¢ if message is 50¢ to 99¢;
15¢ if message is $1.00 to
$1.99; 20¢ if message is
$2.00 or over. Tax is to
terminate 7/1/34
1933
P.L. 73-67
No Tax
Extension of tax until 7/1/35
1935
Pub. Res.,
No Tax
Extension of tax until 7/1/37
No. 36
1937
Pub. Res.,
No Tax
Extension of tax to 7/1/39
No. 48
1939
P.L. 76-155
No Tax
Extension of tax to 7/1/41
1940
P.L. 76-656
No Tax
Extension of tax to 7/1/45
1941
P.L. 77-250
6% (First tax on local
5¢ for each 50¢ or fraction
telephone calls)
thereof, if message is over
24¢
1942
P.L. 77-753
10%
20% if message is over 24¢
1944
P.L. 78-235
15%
25% if message is over 24¢
Tax to terminate 6
Tax to terminate 6 months
months after end of
after end of hostilities
hostilities.
1947
P.L. 80-17
The tax increase provided by the 1944 legislation (P.L.
235) was to end 6 months after the termination of
hostilities. This act continued the tax rates indefinitely.
1954
P.L. 83-591
10%
10% if message is over 24¢
1958
P.L. 85-859
10%
10%–eliminates the 24¢
charge limitation
1959
P.L. 86-75
10% Tax is to terminate
10%
for bills rendered on or
after July 1, 1960
1960
P.L. 86-564
10% Effective date of
10%
repeal postponed until
July 1, 1961
1961
P.L. 87-72
10% Effective date of
10%
repeal postponed until
July 1, 1962
1962
P.L. 87-50
10% Effective date of
10%
repeal postponed until
July 1, 1963

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Year
P.L. Number
Tax on General (Local)
Tax on Toll (Long Distance)
Telephone Service
Telephone Service
1963
P.L. 88-52
10% Effective date of
10%
repeal postponed until
July 1, 1964
1964
P.L. 88-348
10% Effective date of
10%
repeal postponed until
July 1, 1965
1965
P.L. 89-44
Reduce to 3%, 1/1/66;
Same tax rate as for general
Reduce to 2%, 1/1/67;
(local) telephone service
Reduce to 1%, 1/1/68;
Repeal, 1/1/69
1966
P.L. 89-368
Raise to 10%, 4/1/66;
Same tax rate as for general
Reduce to 1%, 4/1/68;
(local) telephone service
Repeal, 1/1/69
1968
P.L. 90-285
10% Temporary extension from 3/31/68 until 4/30/68
1968
P.L. 90-364
Extension at 10%;
Same tax rate as for general
Reduce to 5%, 1/1/70;
(local) telephone service
Reduce to 3%, 1/1/71
Reduce to 1%, 1/1/72
Repeal, 1/1/73
1969
P.L. 91-172
Extension at 10%;
Same tax rate as for general
Reduce to 5%, 1/1/71;
(local) telephone service
Reduce to 3%, 1/1/72;
Reduce to 1%, 1/1/73;
Repeal, 1/1/74
1970
P.L. 91-614
Extension at 10%;
Same tax rate as for general
Reduce to 9%, 1/1/73;
(local) telephone service
Reduce to 8%, 1/1/74;
Reduce to 7%, 1/1/75;
Reduce to 6%, 1/1/76;
Reduce to 5%, 1/1/77;
Reduce to 4%, 1/1/78;
Reduce to 3%, 1/1/79;
Reduce to 2%, 1/1/80;
Reduce to 1%, 1/1/81;
Repeal, 1/1/82
1980
P.L. 96-499
Extension at 2%;
Same tax rate as for general
Reduce to 1%, 1/1/82;
(local) telephone service
Repeal, 1/1/83
1981
P.L. 97-34
Extension at 1% rate
Same tax rate as for general
for 2 additional years;
(local) telephone service
Reduce to 1%, 1/1/82;
Repeal, 1/1/85

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Year
P.L. Number
Tax on General (Local)
Tax on Toll (Long Distance)
Telephone Service
Telephone Service
1982
P.L. 97-248
Raise to 3%, 1/1/83;
Same tax rate as for general
Repeal, 1/1/86
(local) telephone service
1984
P.L. 98-369
Extension at 3% rate for
Same tax rate as for general
2 additional years;
(local) telephone service
Repeal, 1/1/88
1987
P.L. 100-203
Extension at 3% rate for
Same tax rate as for general
3 additional years;
(local) telephone service
Repeal, 1/1/91
1990
P.L. 101-508
Made permanent at a 3%
Same tax rate as for general
rate
(local) telephone service

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