Cell phone taxes and the tragedy of the anticommons

by on January 26, 2012 at 11:05 am in Current Affairs, Economics, Web/Tech | Permalink

Why are cell phone taxes so high? In the United States we tax cell phones more than beer. The usual explanations for high taxes, negative externalities and low elasticity of demand don’t seem to apply to cell phones. Our colleagues Thomas Stratmann and Matt Mitchell offer an answer based in political economy.

…no single politician does choose to tax them that much. Instead, the high taxes that we pay on our cell phones are the sum of lots of little taxes imposed by several different political entities. Consider, for example, the tax bill of a typical New Yorker. It includes a federal USF fee, four state taxes, five city taxes, and a local 9-1-1 fee. Each of these is relatively small, but when you add it all up, the combined rate is over 22 percent.

…The mobile service tax base appears to suffer from a tragedy of the anticommons…numerous overlapping tax authorities seek to obtain revenues through wireless-service taxation, and this may lead to overexploitation of the tax base.

…We use state-level data from three years to examine the possible economic, demographic, and political factors that might explain the variation in these rates. We find that wireless tax rates increase with the number of overlapping tax bases.

Hat tip: Neighborhood Effects.

IVV January 26, 2012 at 11:15 am

Sounds like par for the course for NYC. Lots of individual authorities, each demanding their cut.

Yancey Ward January 26, 2012 at 4:13 pm

You probably are unaware of it, but if you mention them in a comment, there is a tax due.

MM January 26, 2012 at 11:30 am

What location has the lowest rate of tax add-ons?

david January 26, 2012 at 11:36 am

Federalism!

Trey January 26, 2012 at 11:38 am

On a semi-related note, how many people realize that we’re paying a 7.5% federal tax on airfare – before all the well-known fees that have historically been added once a fare is chosen? My full rant on this is here: http://www.grandiloquentbloviator.com/2012/01/alls-fare.html

NAME REDACTED January 26, 2012 at 11:46 am

Yep, lots of things that people think are expensive… are in part due to hidden tax involvement.

figleaf January 26, 2012 at 12:49 pm

Yeah! Why should air travellers have to pay for the FAA, TSA, airport construction, air traffic management, air marshals, or any of that stuff? Sheesh, what next? Gas taxes to pay for highway construction?

Oh wait, I think since the Reagan administration most of that money goes into the general fund (just like nearly all the “user fees” they were so fond of.)

figleaf

Trey January 26, 2012 at 1:15 pm

FWIW, I think I anticipated and addressed this argument in my post. You may have gotten bored and lost interest before you got to that part, though. My rant was expressly not against taxes per se, but against obfuscation and in favor of transparency.

jimi January 26, 2012 at 3:15 pm

love your tagline.

Nylund January 26, 2012 at 11:39 am

I think the article overall has it right, but I’m not sure I agree with you on the “low elasticity of demand.”

How does one change the “quantity demanded?” I can see two meaningful ways with respect to cell phones. Either switching to a lesser plan (less minutes, less data) which are pretty large and discrete changes, or the binary choice of phone or no phone. Both can involve steep switching costs (and penalties depending on your contract situation) as well as, in my case especially, a drastic change in how I conduct my business. I can’t really say, “OK, I’ll reduce my usage by 3%” it’s more like a big jump (a change in plans from 500 minutes to 300), or an all or nothing jump (ie, deciding not to have a cell phone). This doesn’t hold as well for no-contract/pay-as-you-go plans, but I’d imagine that’s the minority of the market.

In short, I’d say that my demand is pretty darn inelastic, especially given the way I conduct business. As much as I say I wouldn’t, if actually faced with the situation, I’d probably suffer through a pretty steep price change before it got to the point where I finally felt compelled to change my usage habits (and the underlying way I conduct business.)

In that sense, they’re taxing me a lot because they can get away with it. I’ll put up with a lot because the alternatives are even more costly. I think that’s pretty much the standard “low elasticity of demand” story, isn’t it?

John Thacker January 26, 2012 at 11:57 am

Plenty of people do have pay-as-you-go plans, which aren’t quite so sticky, even if those do tend to be lower end.

All you can eat buffet plans tend to be better for the middle class and above, unless explicitly funded via progressive taxation.

William Baude January 26, 2012 at 11:39 am

I would have thought that cell phones actually have a quite low elasticity of demand. Most people want one, and very few want two.

John Thacker January 26, 2012 at 11:58 am

Many of the taxes were adopted when they were for “the rich,” and it is difficult to cut off an existing revenue stream. (Tinker with the numbers, yes, but abolishing is rarer.)

NAME REDACTED January 26, 2012 at 11:45 am

This is why the founders tried to separate state powers from federal powers.

The Other Jim January 26, 2012 at 12:00 pm

>Why are cell phone taxes so high?

Because they are used by everyone, including low and middle-income people. The Government can’t come out and raise the income tax rate on people making under 20K, but they can certainly stick them with a “Federal USF fee.” So they do. In spades.

See also: cable television, gasoline and electricity. God help us if they ever figure out how to tax carbon.

Dunbyu January 30, 2012 at 2:57 am

It’s coming, just been introduced in Australia and I believe Canada as well.

Rahul January 26, 2012 at 12:00 pm

How exactly do the city taxes apply? Which city? City of residence? Can one get around it by using a dummy outside-of-tax-area residence; I mean it is a cellphone after all?

Slocum January 26, 2012 at 12:33 pm

NY Billing address? And keep in mind t hat New York is *very* aggressive about taxes & residency:

http://www.secondshelters.com/2011/02/13/double-taxing-think-twice-about-having-a-second-home-in-new-york-state/

Willitts January 26, 2012 at 4:39 pm

It’s based on your billing address.

I had my bill going to my workplace because I only had my work address while we were house hunting. After we bought, I changed it to my new address. I noticed my monthly payment dropped and I looked at my bills. The tax in Chicago was a LOT higher than my new community.

Rahul January 26, 2012 at 11:44 pm

I see a dummy-billing-address company opportunity. Who wants paper bills anyways these days? Imagine $3 saved per month by millions of subscribers.

Thom January 27, 2012 at 1:01 pm

Yes. Pick a different address and switch to paperless billing. I have to believe that at least a few million people have caught on to this by now.

RM January 26, 2012 at 12:25 pm

I have always thought that a good progressive tax system would tax fancier phones (smartphone, etc.) more than they tax ordinary phones.

n=1 January 26, 2012 at 1:47 pm

I think the taxing authorities are doing this, after a fashion, by piggybacking on the carriers’ arcanely tailored pricing tiers. Ad valorem on a $100/mo. iphone account yields more revenue than a $30 prepaid. For now, the taxing authorities are probably content with this self selection. Also note that some jurisdictions are providing cellphones and minimal plans (300 min./mo. is one that I have seen) as part of welfare subsistence grants.

figleaf January 26, 2012 at 12:37 pm

I don’t know about New York but at least here in the Pacific Northwest (and I think up and down the west coast) early adopters of the first easily portable cell phones became something of a conspicuous-consumption public nuisance. They were very-often ostentatiously displayed, they didn’t have “vibrate” modes so they rang indiscriminately, and people really did answer the #%!#% things in movie theaters (wow, remember those?) with loud declarations to their callers to “speak up, it’s hard to hear because I’m on my cell phone in a movie theater!”

For better or worse it was… pretty easy for legislators to slap (where often the intention really was meant as a slap) what were basically luxury taxes on the then-obnoxious devices and their (too often) even more obnoxious owners. Camel’s nose under the tend and all now that cell plans cost dozens of dollars a month instead of hundreds or even thousands the proportion of taxes has grown unreasonably high. (Hey, a $22/month tax on an early Cellular One plan was nearly a rounding error.) Nowadays it’s not so great. It’s even less great when you consider that (hat tip, for once, to Newt Gingrich’s forecasting) the poor and homeless are often better off with a cell plan than a land-based one.

Anyway, at this point the tax levies on cell phone service are neither libertarian nor liberal/progressive. So yeah, time to, um, dial them back.

Good call, Alex.

figleaf

Bill January 26, 2012 at 1:38 pm

They missed the biggest tax of all: state sales taxes that are added to the bill.

Go back and redo the study.

Bill January 26, 2012 at 1:46 pm

I will Skype you from on vacation from a high tax state using my URL from a low tax state from the lobby of the high sales and low income tax state I am visiting.

Bill January 26, 2012 at 4:45 pm

The reason the could have omitted state sales taxes maybe is that they were trying to make a political point: note the “dem” variable as it applies to city, but not state, taxes.

KLO January 26, 2012 at 2:39 pm

There are some misapprehensions here. Many of the so-called taxes are not taxes at all, or at least not taxes levied directly on the consumer. The federal universal service charge tax is levied on carriers and operators, not the customer. Some carriers and operators assess a fee against customers that is identical to the FUSC they are charged. This has absolutely nothing to do with the FUSC itself and everything to do with being able to advertise lower rates than are actually offered by the carrier or operator.

In addition to the USF fee, my Verizon Wireless bill in Virginia includes a “regulatory charge,” an “administrative charge,” a “Virginia Gross receipts surcharge,” and a “local business license surcharge.” None of these are taxes payable to any government. All of them are fees tacked on by the carrier that are designed to look like taxes and that allow it to advertize lower rates than it actually offers.

The only taxes are a 5% Virginia communications tax and a $.75 per line per month 911 fee. How onerous!!!

KLO January 26, 2012 at 2:51 pm

As a follow-up, I do recognize that some of the taxes levied on carriers and operators are passed through the the consumer. Indeed, it is possible that most of the taxes are passed through. But I find it fundamentally misleading for the authors to claim as they do that the federal USF fee is paid entirely by the end wireless customer when the tax is not levied on customers. No where do they mention the seemingly significant fact that these the USF fee is assessed against carriers’ revenues. Instead, they treat it as though it were the same as New York City’s sales tax.

Willitts January 26, 2012 at 4:42 pm

How about $16 per month? Is that onerous enough for you?

Some cities charge a LOT more than yours.

DC January 26, 2012 at 3:39 pm

If you really want to gag go look at rental car taxes. On a base car they can easily exceed the rental charges and since they mainly hit visitors to a metropolis they are in effect taxes without representation. Hotels aren’t far behind.

Silas Barta January 26, 2012 at 5:06 pm

Yeah, I found that out the hard way when renting a car online for a planned trip to california. It was something like, $90 rental plus $60 taxes.

Vadim January 26, 2012 at 6:05 pm

How is this a tragedy of the anitcommons? Numerous overlapping tax authorities overexploting a tax base because none can exclude the others – this a classic tragedy of the commons.

NAME REDACTED January 26, 2012 at 10:53 pm

+1

NAME REDACTED January 26, 2012 at 10:53 pm

In this case the commons are us tax-cows.

Sergeant Tomato January 26, 2012 at 11:56 pm

I would have thought that cell phones did have low elasticity of demand. Can the Federal government prohibit local and state taxation of cell phone service by invoking the commerce clause?

Thom January 27, 2012 at 1:03 pm

I’m pretty sure the Federal Government can do whatever it wants by invoking the commerce clause.

JWatts January 27, 2012 at 11:28 am

For a period, my wife and I had some foster children. The state requires an actual land line to be on the premises. So we looked at the most basic plan. The rate was $14.99 per month. The after tax bill was over $30.

responsible D January 27, 2012 at 3:34 pm

They’re taxed heavily because the carrier and its billing system do all the collection work. It’s the path of least resistance, nothing more.

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