Communication Tax Reform Commission in Home Stretch – Looking More Closely at State Revenues

The Maryland Communications Tax Reform Commission, which began meeting last fall, held its first meeting of the interim to discuss revenue data collected from the industry and local governments, and provide an analysis of the two proposals offered by the wireless community during its December 2012 meeting.

Although the Commission has been charged with assessing the “feasibility and fiscal implications for the State and local governments of a modernized, competitively neutral communications tax and fee system,” following a presentation by the Comptroller’s Office describing the revenue implications of the wireless industry proposals, discussion focused on proposing State reforms and deferring action at the local level. The Commission plans to hold its final meeting on June 12, 2013 to vote on such a proposal.

A separate information analysis provided by the Comptroller’s Office during the May 16, 2013 meeting indicated that annual communications tax and fee revenue totaled, $555 million in Fiscal Year 2012 – $283.5 million in State revenues and $271 million in local revenues. Of the ten State revenue sources, the largest was the sales tax on wireless communications, $132.8 million, followed by the Public Service Company Franchise Tax, $34.2 million, and the Corporate Income Tax, $32.4 million. Of the five revenue sources at the local level, the largest was the local sales/excise tax levied on telecommunications in five jurisdictions, $136.3 million, followed by franchise fees levied by all but six jurisdictions, $71.2 million, and the local 9-1-1 fee which benefits all jurisdictions, $41.3 million.

The information analysis further analyzed how these revenues would be affected by each of the proposals offered by the wireless community for communications tax reform: 1) Comprehensive state-local communications tax reform – replace most taxes a fees with a 6% sales tax on all communications; and 2) Reform of discriminatory telecommunications taxes – replace most taxes and fees with a 6% sales tax on telecommunications.  Both proposals would have negative fiscal consequences for the State and local governments. Conclusions from the information analysis are below.

The enactment of the tax and fee structure in the first proposal would decrease aggregate State and local government revenue by approximately $73.6 million. In order to hold fiscal year 2012 revenue constant, a communications tax rate of 7.2% is required rather than the 6.0% rate proposed. Instituting the second proposal’s tax and fee structure would diminish revenue to a greater extent, decreasing collections by $106.3 million in fiscal year 2012 and requiring a tax rate on telecommunications services of approximately 8.7% in order to retain the current level of communications revenue.

Representatives from MACo and MML raised concerns with the proposals stating that they did not meet the principles for communications tax reform provided by the organizations in the fall.

In response to the Comptroller’s analysis, the wireless representatives acknowledged the challenges associated with both proposals due to the variance in local taxes and revenues, and suggested that an alternative proposal be provided that would only focus on State reform and defer local government reforms.  Once developed, this proposal will be distributed to Commission members for review prior to the next meeting.  The Commission plans to discuss and vote on this proposal on June 12.

Additional information on the Communications Tax Reform Commission can be found on Conduit Street.