Cell phone users in 47 states now pay wireless taxes that now exceed their average retail sales tax. States like Nebraska and Florida pay taxes over 20%. Likely, as the Tax Foundation argues, state lawmakers see cell phones as a deficit-filling honeypot, a stealthy way to increase taxes without alarming their base.
State lawmakers face a grand total of over $140 billion in budget deficits. And, while many of the newly elected legislators won seats on the idea of reigning in government spending, looming deficits leave them looking for a new way out. But for as much revenue as they surely create, these wireless taxes are simply bad policy for a number of reasons.
Mercatus Center’s Daniel M. Rothschild’s latest white paper on cell phone taxes lays out the problems associated with this policy, both economic and political. Of course, topping his list of problems are those age-old principles. Cell phone taxes violate the “principle of tax neutrality,” he writes. Lawmakers are simply not thinking through the ramifications of their tax policy.
Wireless Internet is an elastic good–as prices go up, consumption goes down. Taxes on wireless Internet increase the price of the good, and people simply purchase less of it. Not only does this unfairly attack an industry, it creates less and less revenue for government.
Rothschild argues that a rational policymaker, knowing that burdensome taxes means decreased revenues and reduced consumption, must have one of two other motivations: to reduce a vice behavior or to limit a “negative externality.”
Historically, only government deemed “vices” have managed to see taxation at this level, with wireless taxation often higher than even tobacco and liquor taxes. But with a federal emphasis on encouraging wireless broadband growth, no matter how misguided the effort may be, it’s hard to believe that lawmakers consider broadband access a “vice.”
Wireless taxes do share a number of commonalities with sin taxes, however. Like tobacco and liquor taxation, wireless taxes are regressive, disproportionately affecting low income and minority populations. Rothschild takes this on as the second major problem. Low income and minority populations are far more likely to rely on wireless plans as their main access to the Internet. These taxes have potential to push them out of the market and restrict their access point to the Internet. The Heartland Institute’s Marc Oestreich also points out that the taxes seem to target minorities, two-thirds of whom live in wireless-only households (their only access to the Internet coming through wireless signals).
Lastly, Rothschild argues that cell phone taxes have expanded well beyond a typical user fee, which usually funds whichever item it’s directly taxing. Revenue from cell phone taxes are all too often used to fund completely unrelated projects or into the Universal Service Fund money pit. Rothschild writes, “there is little economic logic to funding, for instance, poison control centers through excise taxes, since cell phone ownership does not encourage the poisoning of third parties.”
Instead, he advocates completely eliminating programs, such as the Universal Service Fund, that spend more on bureaucracy than on what it was actually intended to do. This, he says, is the only way to truly expand access, lower cost, and force politicians into honest budget practices.
Rothschild puts a bow on the issue in his white paper. “Such taxes would be inefficient, discriminatory, and inequitable, not to mention detrimental to infrastructure investment and consumer take-up.” The Wireless Tax Fairness Act, a federal moratorium on cell phone tax increases, goes a long way to preventing future discriminatory taxes, but lawmakers must do the economically reasonable thing and reduce these taxes before more damage is done.
Zack Christenson is a Chicago-based digital strategist who writes on tech policy.