As Republicans seek repeal of communications service tax, Democrats warn it’s too soon
This article was updated at on March 21 at 10:20 a.m. to clarify that the communications services tax revenue is equivalent to half the annual budget of the state’s community college system.
Since 1990, New Hampshire has taxed telephone communications, collecting $30 million a year in revenues from service providers who pass the tax onto customers.
This year, Gov. Chris Sununu and Republican lawmakers are hoping to eliminate that tax. And some Democrats are pushing back, arguing the revenue lost could pay for programs like the community college system and shouldn’t be removed.
“I just think the idea that we’re going to tax people’s phone calls is old, antiquated, and, more importantly, unnecessary,” said Sununu in remarks before the House Finance Committee in February.
Sununu and others have called it a regressive tax on people who rely on landlines, and have pointed to shifts in technology that have reduced reliance on phone calls in recent years.
The governor’s proposed budget, released in February, would repeal the tax. Sununu’s office projects a $57.8 million intake over the next two years.
Too soon, or long overdue?
To supporters of repeal, new technological realities make the tax outdated.
The tax applies to “two-way electromagnetic communications services,” which include landline phones, mobile phones, faxes, two-way commercial radios, and pagers.
But opponents say it primarily burdens older and lower income residents who continue to use landlines and don’t have easy access to cellular data.
Katherine Loughead, senior policy analyst at the Tax Foundation, a center-right think tank, argued the communications tax is different from other targeted sales taxes like gas taxes and alcohol taxes because it doesn’t act as a financial check on a vice, like an alcohol tax, and it isn’t tailored to the use of a government service, like a gas tax.
“Ideally when states levy excise taxes on specific goods or services or activities, those taxes should either function as a type of user fee, or they should seek to recoup the negative externalities associated with that activity,” Loughead said at a January hearing on House Bill 133 – a standalone bill to repeal the communications tax.
But to some Democrats, the repeal effort is too hasty.
Rep. Susan Almy, a Lebanon Democrat and the former chairwoman of the House Ways and Means Committee, noted that the communications tax has taken in less revenue. But she said the $30 million it brings in per year is still too significant to justify eliminating it now.
“It has been going down fairly consistently and it will be disappearing one of these days, and we probably will have to get rid of it at one point or another,” she said in an interview. “But to do it right now? It’s going to take that money out of programs that are not going to be funded that people depend on.”
Even with a recent decline in the revenue it’s pulling in, the tax makes up about 1.5 percent of the state’s general fund. That revenue – about $29 million a year – is equivalent to about half the annual budget for the community college system of New Hampshire, and equal to about a quarter of the amount of money the state shares with cities and towns from the meals and rooms tax, noted Phil Sletten, research director at the New Hampshire Fiscal Policy Institute.
To Almy, the ambitious spending increases in the governor’s budget – from a 10 percent raise for state employees to a 3.1 percent increase in the Medicaid reimbursement rate – mean the state can’t afford to lose any revenue source.
And while the impact of the communications tax is small today, it could take on a bigger importance if the country experienced a recession, Sletten said, which would likely hit the state’s business taxes the hardest. A reduction in revenue there could make smaller taxes like the communications tax more important for the state’s overall budget.
Other states are planning to use their communications tax to help bolster mental health hotlines, such as 988, the national suicide prevention hotline that was launched last year. Five states have passed telephone taxes or fees that help pay for services that residents in those states can be directed to if they dial 988, according to the National Alliance on Mental Illness (NAMI).
But supporters of the tax repeal – who include House Majority Leader Jason Osborne, an Auburn Republican – have pointed to the state’s revenue surplus as an indication that the state can afford to eliminate a revenue source.
A tax before cell phones
New Hampshire’s communications tax came in long before Zoom became a household name during the pandemic.
The tax was first introduced in New Hampshire in 1990, when lawmakers set a 5.5 percent tax on communications
Since 1990, the tax has been raised to 7 percent, and it applies to the “gross charge” that a customer pays a company for two-way phone services. That means customers pay more or less depending on their phone plans.
Currently customers of mobile companies like Verizon or AT&T who pay $50 a month for phone and data services see a flat 7 percent tax added to that charge every month – or $3.50.
Customers who use landline services that charge by the call – or who buy “minutes” to call or text – must pay the 7 percent tax on whatever the final monthly charge ends, noted Keen Wong, a tax policy counsel at the Department of Revenue Administration.
The customer that pays a monthly fee gets a flat rate of tax; the customer that pays by the minute will see their tax burden fluctuate month to month.
In 2012, the state law was updated to exclude internet services, resulting in a major drop in yearly revenue. The state took in $81 million in state fiscal year 2010 – a historical high, according to the New Hampshire Fiscal Policy Institute. In fiscal year 2013, after the exclusion, that dropped to $57.4 million, the Department of Revenue Administration reported.
But the tax still applies to Voice over Internet Protocol services and cell phone and landline calls. Service providers are required to collect the tax from consumers by adding it to their bill, then pass the revenue on to the state.
Still, even after the changes in 2012, the tax has taken in less and less revenue over the last decade. After raking in $57.4 million in 2013, the revenue dropped to $47.8 million in fiscal year 2017, to $40 million in fiscal year 2021. Overall, the tax brought in 64 percent less revenue in 2022 than in 2010.
Shifting technologies, lower revenue
The causes behind that decrease are numerous, experts say. Most are technological. People rarely use fax machines and pagers these days, and many do not use landlines, said Sletten. Meanwhile, those who use cell phones to communicate spend less time on the phone and more time using services that require data, like texting and messaging, which aren’t taxed.
“This is formally the communication services tax, but it is sometimes referred to in state documentation as the telephone tax, so that tells you something about how important landline phones are to the tax base,” Sletten said.
Landlines are a key piece of the tax, Sletten noted, meaning “…if landline telephone usage goes down, as it likely has been, we’d see an erosion in the communication services tax base.”
The decrease in revenue could also be caused by how telecommunications companies are categorizing their users’ activity when they add the tax. Recently, companies have been more careful to differentiate between what activity counts as cellular data use – which is not taxed – and what counts as a two-way communication which is, Wong said.
“More and more of the fees (the companies) are receiving are for Internet access, versus two-way communication,” Wong said.
The Department of Revenue Administration audits communications companies to ensure they are categorizing the activity correctly, Wong added; those audits are confidential.
While the tax has taken in less every year, the last fiscal year shows a major drop recently. While the communications services tax brought in $40 million in Fiscal Years 2021, it brought in only $29.9 million in fiscal year 2022 – a 25 percent year-to-year drop.
Wong said the department does not know the exact reason for that sudden dip. Sletten did not speculate on the cause either.
Whatever the underlying causes behind the decline in the tax, Republicans argue it’s ripe for elimination.
“This one is probably low priority,” Osborne told the House Ways and Means Committee in January. “The only reason I suggested it was just because of the relatively low dollar amount.”
“I always go back to that axiom: It’s the citizens’ money, not ours,” Sununu said to the Finance Committee. “If we don’t need as much of it, give it back to them in some form.”