The Federal Excise Tax on Telephone Service: A History

CRS Report for Congress
The Federal Excise Tax on Telephone Service:
A History
Updated June 30, 2005
Louis Alan Talley
Specialist in Taxation
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

Federal Excise Tax on Telephone Service: A History
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cents applied only to long-distance service and was repealed in 1902.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that the tax was again repealed.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% tax rate.
In the current Congress a confluence of events has led to renewed interest in the
federal excise tax on communication services. The Joint Committee on Taxation has
issued a report including three possible options for changes to the tax. A study by the
Congressional Budget Office discusses the possible elimination of the tax. Bills in
both the House and the Senate have been introduced calling for the tax’s repeal
(including H.R. 1898). Any additional changes made to the tax will be reflected in
an updated report.

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
Recent Developments..............................................7
List of Tables
Table 1. Brief Legislative History of the Telephone Excise Tax.............8

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

1 26 United States Code ¶ 4251.
2 30 Statutes at Large 460 [P.L. 55-133.]

that 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.

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 is1112
imposed.” Work on the Revenue Act of 1918 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,


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.

World War II
Just prior to the entrance of the United States into World War II, the Revenue14
Act of 1941 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 of1516
1942 and the Revenue Act of 1943. 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
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. [P.L. 77-250.]
15 56 Statutes at Large 975. [P.L. 77-753.]
16 58 Statutes at Large 61. [P.L.. 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. [P.L. 80-17.]
19 68A Statutes at Large 503. [P.L. 83-591.]
20 72 Statutes at Large 1289. [P.L. 85-859.]

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.25
Accordingly, Congress enacted the Tax Adjustment Act of 1966. 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. [P.L. 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 P.L. 86-

564; to July 1, 1962 by P.L. 87-72; to July 1, 1963 by P.L. 87-50, to July 1, 1964 by P.L. 88-

52; and to July 1, 1965 by P.L. 88-348.

24 79 Statutes at Large 136. [P.L. 89-44.]
25 80 Statutes at Large 66. [P.L. 89-368.]
26 82 Statutes at Large 265. [P.L. 90-364.]

31, 1969, with provision for its subsequent reduction and repeal by calendar year


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. [P.L. 91-172.]
28 84 Statutes at Large 1843. [P.L. 91-614.]
29 94 Statutes at Large 2694. [P.L. 96-499.]
30 95 Statutes at Large 351. [P.L. 97-34.]
31 96 Statutes at Large 568. [P.L. 97-248.]
32 98 Statutes at Large 507. [P.L. 98-369.]
33 101 Statutes at Large 1330-438. [P.L. 100-203.]
34 104 Statutes at Large 1388-437. [P.L. 101-508.]

Recent Developments
Little legislative interest was shown in the communication excise tax during thethth
107 and 108 Congresses. However, a confluence of events has led to renewed
interest in this tax during the 109th Congress. This resurgence in interest in the
communications excise tax is predicated on the fact that new technologies and
marketing practices have emerged in recent years. Among the technology and
marketing practice changes are:
!Current law provides private communication services with
exemption from the federal excise tax. Larger companies may thus
be able to purchase telephone equipment that reduces both their
communication costs and their federal excise tax liability.
!Technological change has blurred the lines between taxable and tax-
exempt service. For example, in the case of VOIP (voice over
internet protocol) voice transmissions are sent in the form of packets
of information and are indistinguishable from text messages or e-
mails which are tax-exempt.
!Companies now offer “bundles” of service which can include both
communication services which are subject to the excise tax along
with other services (i.e. cable tv, DSL, wireless internet access, and
text messaging) not subject to tax.
!In some cases, newer marketing plans include the option for
consumers to purchase time that is usable nationwide without long-
distance charges. The Internal Revenue Code defines taxable long
distance communication services as having both the features of time
and distance. As a result, the Internal Revenue Service has lost most
of those court cases in which taxpayers have requested a refund of
the communications excise taxes previously paid.
In January 2005, the staff of the Joint Committee on Taxation issued a report
designed to offer options to improve tax compliance and reform tax expenditures.
Included were three possible options for changes to the federal excise tax imposed35
on communication services. The three proposals either clarified the existing tax or
extended the tax to newer communication technologies with a resultant increase in
federal tax revenues. Shortly afterwards, a study on budget options by the
Congressional Budget Office proposed the possible elimination of the36
communication excise tax.
Representative Gary Miller introduced legislation (H.R. 1898) calling for repeal
of the communications tax. When introduced the legislation had 39 co-sponsors.
This legislation has grown to include 100 members of the House of Representatives,
some of whom sit on the House Ways and Means Committee. Senator Rick

35 U.S. Congress. Joint Committee on Taxation. Options to Improve Tax Compliance and
Reform Tax Expenditures. 109th Congress, 1st session. JCS-02-05. Washington: GPO,

2005. pp. 368-378.

36 U.S. Congressional Budget Office, Budget Options, Feb. 2005, p. 333.

Santorum along with other members of the Senate Finance Committee have
introduced companion legislation (S. 1321). At a news conference, Senator
Santorum stated that “the telephone tax is regressive, inequitable, inefficient and
unnecessary tax that Congressional policy makers have found to serve no rational
policy purpose.”37
Table 1. Brief Legislative History of the Telephone Excise Tax
Tax on Toll (Long
YearP.L. NumberTax on General (Local)Telephone ServiceDistance) Telephone
1898P.L. 55-133No Tax1¢ if message is 15¢ or more
1902P.L. 57-67No TaxTax repealed

1914P.L. 63-217No Tax1¢ if message is 15¢ or more.

Effective date through
1915Pub. Res., No. 2No TaxExtension of tax through
1916P.L. 64-271No TaxTax expired
1917P.L. 65-50No Tax5¢ if message is 15¢ or more
1919P.L. 65-254No Tax5¢ if message is over 14¢ and
no more than 50¢; 10¢ if
more than 50¢; 10% on
leased wire or talking circuit
special service
1921P.L. 67-98No TaxRates unchanged from prior
law. Changes made in
1924P.L. 68-176No TaxTax repealed

1932P.L. 154No Tax10¢ 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
1933P.L. 73-67No TaxExtension of tax until 7/1/35
1935Pub. Res.,No TaxExtension of tax until 7/1/37
No. 36

1937Pub. Res.,No TaxExtension of tax to 7/1/39

No. 48
37 Kurt Ritterpusch, “Finance Members Introduce Bill to Repeal Telephone Excise Tax,”
Daily Tax Report, (Washington, DC) no. 124, June 29, 2005, p. G-5.

Tax on Toll (Long
YearP.L. NumberTax on General (Local)Telephone ServiceDistance) Telephone
1939P.L. 76-155No TaxExtension of tax to 7/1/41
1940P.L. 76-656No TaxExtension of tax to 7/1/45
1941P.L. 77-2506% (First tax on local5¢ for each 50¢ or fraction
telephone calls)thereof, if message is over


1942P.L. 77-75310%20% if message is over 24¢

1944P.L. 78-23515%25% if message is over 24¢

Tax to terminate 6Tax to terminate 6 months
months after end ofafter end of hostilities

1947P.L. 80-17The 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.

1954P.L. 83-59110%10% if message is over 24¢

1958P.L. 85-85910%10% — eliminates the 24¢

charge limitation

1959P.L. 86-7510% Tax is to terminate10%

for bills rendered on or
after July 1, 1960

1960P.L. 86-56410% Effective date of10%

repeal postponed until
July 1, 1961

1961P.L. 87-7210% Effective date of10%

repeal postponed until
July 1, 1962

1962P.L. 87-5010% Effective date of10%

repeal postponed until
July 1, 1963

1963P.L. 88-5210% Effective date of10%

repeal postponed until
July 1, 1964

1964P.L. 88-34810% Effective date of10%

repeal postponed until
July 1, 1965
1965P.L. 89-44Reduce 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

Tax on Toll (Long
YearP.L. NumberTax on General (Local)Telephone ServiceDistance) Telephone
1966P.L. 89-368Raise to 10%, 4/1/66;Same tax rate as for general
Reduce to 1%, 4/1/68;(local) telephone service
Repeal, 1/1/69
1968P.L. 90-28510% Temporary extension from 3/31/68 until 4/30/68
1968P.L. 90-364Extension 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
1969P.L. 91-172Extension 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
1970P.L. 91-614Extension 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
1980P.L. 96-499Extension at 2%;Same tax rate as for general
Reduce to 1%, 1/1/82;(local) telephone service
Repeal, 1/1/83
1981P.L. 97-34Extension at 1% rateSame tax rate as for general
for 2 additional years;(local) telephone service
Reduce to 1%, 1/1/82;
Repeal, 1/1/85
1982P.L. 97-248Raise to 3%, 1/1/83;Same tax rate as for general
Repeal, 1/1/86(local) telephone service
1984P.L. 98-369Extension at 3% rate forSame tax rate as for general
2 additional years;(local) telephone service
Repeal, 1/1/88
1987P.L. 100-203Extension at 3% rate forSame tax rate as for general
3 additional years;(local) telephone service
Repeal, 1/1/91
1990P.L. 101-508Made permanent at a 3%Same tax rate as for general
rate(local) telephone service