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.