Regulatory Reform

Calling for Excessive Cell Phone Taxes? Please Press One

By Michael Lambert

If you’re subscribing to a cell phone in Washington State, you might want to consider becoming an Oregonian, where lower cell phone taxes are markedly cheaper.

According to a recently released study by the Tax Foundation, American consumers pay on average 17 percent in cell phone taxes by the time federal, state and local rates are taken into account.  Even so, some states seem all too eager to hang up on taxpayers as a handful of them impose a combined federal-state-local average tax of over 20 percent.  Some states tend to prefer cell phone taxes because they are easily hidden from taxpayers through subtlety and semantics—as is typical with most entities looking to quietly raise revenue.  As cell phone subscriptions continue to skyrocket while landline use remains in sharp decline, it is obvious why state governments seeking increased revenue would look to profit from this process of creative destruction.

Unbeknownst to most consumers, cell phone tax rates far exceed those imposed on other consumer products such as alcohol or cigarettes.  Matthew Mitchell and Thomas Stratmann of the Mercatus Center explain in their paper Wireless Taxes and Fees: A Tragedy of the Anticommons that when multiple taxing authorities seek to raise revenue without regard for how often this takes place, the end result is higher overall rates and possible less customer usage of the services provided.

However, with the advent of increased necessity for wireless services and cell phones as this CTIA report shows, abstaining from a subscription is difficult.  The taxing authorities at each level understand this perfect-storm dynamic and seek to exploit it.  Because of deliberately confusing and high cell phone rates imposed by unfair tax regimes by ways of redundant and hidden fees, consumers are forced to pay more in explosive charges thus damaging business and making innovation in the field harder to achieve.

In that same vein, there is certainly evidence linking increased taxes with decreased economic prosperity.  If you look at the Tax Foundation’s list of states in order of their federal-state-local tax rates, the six with the most applied cell phone taxes are in order: Nebraska, Washington, New York, Florida, Illinois and Rhode Island.  In comparison with ALEC’s 2012 edition of Rich States, Poor States, it is observed that of those six states, three (New York, Illinois and Rhode Island) are also considered to be of the ten least economically free in the country.

The data presented in these two studies does not explicitly suggest that higher cell phone taxes yield less economic prosperity on a state level. But, it does represent a trend of state government policies that over-tax and, as a result, cause less economic freedom. The ability for the free market to allow individuals and businesses to innovate in their home states independent of government design must be paramount as it is that freedom that harvests the most prosperity.

Where these government entities get disconnected is the belief that higher taxes allow for more state and local revenue.  It then becomes a matter of debate whether it is more prudent to tax something outright or to allow more participation in a freer market to create more revenue.  The current cell phone tax debacle is a prime example of a centralized authority acting through a façade of localism when if they simply allowed the wireless market to breathe, it would bring them more revenue naturally.  As more people begin to depend on mobile wireless connectivity, the wider the effect of over-taxation will have on both the industry and the capital of the consumer.

In Depth: Regulatory Reform

In his first inaugural address, Thomas Jefferson said that “the sum of good government” was one “which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry.” Sadly, governments – both federal and state – have ignored this axiom and…

+ Regulatory Reform In Depth