State and local governments should overhaul California's telecommunications tax system to stimulate a strategic industry and benefit consumers, concludes a new report issued by the California Policy Research Center of the University of California.

The cumulative taxes are both inefficient and inequitable for sectors within the industry and among state consumers, says the report by university business experts.

"Many people are paying taxes on phone calls that are more than double what they pay in sales taxes on other goods," said James Prieger, an assistant professor economics at the University of California, Davis, and a co-author of the report. "There is no economic reason that telecom should be taxed more than other goods. In fact, given its importance in the Information Age -- and telecom's linkage to so many other sectors of the state's economy and growth -- it probably should be taxed less."

The report was written by telecommunications expert Prieger and two California State University faculty members, Terri Sexton, chair and professor of economics at CSU Sacramento, and Annette Nellen, professor of accounting and finance at San Jose State University.

The report finds that the state's tax system has not kept pace with the rapid technological advances and deregulation in the telecommunications industry. As a result older technologies are disadvantaged, and taxes are skewed to benefit some consumers over others.

Newer entities that do not fit the traditional definition of telecommunications providers under state tax laws, such as cable or satellite providers, are subject to different taxation although they often provide the same services.

For consumers, the heaviest tax burden is distributed to those who can least afford to pay, the report shows.

"The distribution of the burden of current telecommunications taxes is not equitable according to any accepted equity principle," said Sexton, who is also associate director of UC Davis Center for State and Local Taxation.

San Jose State University economist Nellen said a tax system unbalanced in this way also imposes another price, by exerting a drag on economic growth.

"Telecommunications represents a major path by which future economic growth will continue to travel," she said. "Although the telecommunications industry is currently a relatively small part of California's overall economy -- about 2 percent (measured by income) -- it has been growing rapidly and contributes significantly to economic growth as it raises the productivity of a wide range of other industries."

Among the recommendations, the economists say:

• California should extend the Manufacturer's Investment Credit and sales-tax exemption for new equipment purchases to telecommunications companies.
• In cooperation with its local governments, California should simplify and consolidate the various taxes and charges imposed on end-user revenues by local jurisdictions and the PUC.
• California should work with local governments to provide uniform tax relief for low-income individuals and households.

The California Policy Research Center, which sponsored the report, is a University of California program that applies the extensive research expertise of the UC system to important state and federal policy issues. "The Taxation of Telecommunications in California in the Information Age" is available on the Web at http://www.ucop.edu/cprc/telecomtaxrpt.pdf.