Tag Archives: Holy Roman Empire

Why Are Cell Phone Taxes So High?

Nationwide, combined federal, state, and local taxes on cell phone services average more than 16 percent. That makes a cell phone one of the highest taxed goods around. Cell phone taxes are even higher than beer taxes.

Why?

Image by Carlos Porto

My colleague, Thomas Stratmann, and I attempt to answer that question in our latest working paper. Most of the conventional rationales for above-average taxation just don’t apply: cell phones don’t have obvious negative externality characteristics, they are no longer luxury goods, and consumers are not particularly insensitive to price changes.

So why would policy makers choose to tax them so much? Part of the answer is that 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.

We believe that this pattern of taxation is characteristic of what Columbia Law School Professor Michael Heller has called a “tragedy of the anticommons.”

In the better-known tragedy of the commons multiple parties have the right to use one resource and tend to over-use it since they fail to account for the way that their use harms others (think of the ocean; it’s owned by everyone and is over-fished). In a tragedy of the anticommons, however, multiple parties have the right to exclude others from using a resource by taxing or somehow regulating its use.

Heller points to the Rhine river as a classic example. Under the Holy Roman Empire only one party–the Empire–had the right to tax trade on the river. The government was careful, then, not to over-tax (over-exclude) trade. But once the Empire fell, multiple barons gained the right to tax trade (p. 3):

The growing gauntlet of “robber baron” tollbooths made shipping impracticable. The river continued to flow, but boatmen would no longer bother making the journey. . . . For hundreds of years, everyone suffered—even the barons. The European economic pie shrank. Wealth disappeared. Too many tolls meant too little trade.

Like the barons on the Rhine, multiple parties have the power to tax cell phones: Federal, state, county, city, and special district coffers all tax the base. In many cases, multiple taxes apply even at one level of government (e.g. five taxes levied by the city of New York).

We test the anticommons theory using variation in tax rates and taxing entities across the states. We write:

The anticommons problem has two dimensions. First, the mobile-service tax base funds numerous distinct projects at each level of government. Second, the base is taxed by numerous overlapping levels of government. 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.

Delaware’s Robber Barons

I recently drove across the Delaware Turnpike while traveling from Washington to New York.  It had been a while so I didn’t remember that the toll had risen to $4 in 2008 – this for a road 11 miles long. It amounts to 36 cents for eacdelaware-turnpikeh of those 11 miles.  This is ridiculous.

The other tolls I paid driving up Interstate 95 were $2.50 for the JFK Highway in Maryland and $9.05 for the full length of the New Jersey Turnpike. The Maryland highway is 50 miles, and I drove 122 miles in New Jersey, amounting to 5 cents and 7 cents per mile, respectively.

Other Northeast tolls are much like New Jersey and Maryland. Driving the full length of the Massachusetts turnpike covers 135 miles and costs $6.85, amounting to 5 cents per mile. The length of the New York Thruway is 376 miles, costing $17.50, also 5 cents per mile.  The $28.45 toll for driving the entire 358 miles of the Pennsylvania Turnpike comes to 8 cents per mile.

So how can Delaware get away with tolls 5 to 7 times higher than other nearby states in the Northeast?  It is said to be the highest toll per mile in the United States. It helps that the Delaware Turnpike feeds into the Delaware Memorial Bridge, one of the few ways of getting across the Delaware River. There are no good alternative routes if you are traveling up the east coast. Once on the New Jersey side of the river, by contrast, it is easy to take Interstate 295, a toll-free road which allows you to bypass at least half of the Turnpike.

Continue reading