Are Cell Phone Taxes Good Tax Policy?

June 16, 2005

With more Americans switching from traditional landlines to cell phones, state and local governments have been scrambling to make up for declining phone tax revenues in recent years.

Alexandria, Virginia is the latest locality to join the trend toward higher cell phone taxes. Alexandrians will pay an additional $3 per month tax on cell service beginning in 2006, or 10 percent for those with bills under $30 per month.

For years, Alexandria has relied on a dependable 25 percent tax on local phone service, bringing in an average of $7.50 per phone line every month. But the revenue stream has been drying up as more residents drop their regular phone service for a cell phone-only lifestyle.

There were about 113,000 residential and business land lines in operation in the city as of July 2004, a drop from more than 120,000 two years earlier, according to Bruce Johnson, director of the city’s Office of Management and Budget.

Rising cell taxes will boost state revenue. But are they good tax policy?

One principle of tax policy is neutrality. Since the essential function of taxes is to raise revenue—and not micromanage market outcomes with subsidies and penalties—taxes should aim for neutrality in economic decision making, and minimize distortions in the marketplace.

As the table below shows, most state and local cell phone taxes are highly non-neutral, since they tax telecommunications services at far higher rates than other general business activity. And as we’ve written before, as selective excise taxes on cell service rise they become more non-neutral, which can lead to rising tax evasion and black market activity.

Total Local, State and Federal Effective Telecommunications Taxes Compared with General Business Taxes by State, 2004

State

Effective General Business Taxes

Effective Telecommunications Taxes

VA 4.50% 33.77%
MD 5.00% 31.31%
TX 8.25% 29.29%
NE 6.50% 29.22%
MO 6.92% 27.79%
WV 6.00% 27.46%
KS 6.75% 26.33%
IL 8.00% 24.95%
MI 6.00% 24.15%
OK 8.45% 23.97%
WA 9.03% 23.26%
NC 7.50% 22.83%
RI 7.00% 22.81%
FL 7.00% 22.15%
GA 7.00% 21.90%
PA 6.83% 21.33%
NY 8.44% 21.29%
AR 8.38% 19.73%
KY 6.00% 18.86%
SC 5.50% 18.65%
MS 7.25% 18.63%
UT 6.25% 18.36%
DC 5.75% 18.24%
CO 8.00% 18.15%
TN 9.25% 17.86%
OR 0.00% 17.20%
LA 9.00% 16.78%
CA 8.10% 16.28%
WY 5.50% 16.09%
AL 8.00% 15.93%
AZ 7.85% 15.75%
ND 6.00% 15.52%
IA 6.50% 15.44%
IN 6.00% 15.16%
OH 7.50% 14.55%
AK 2.50% 13.53%
MA 5.00% 13.30%
MN 7.00% 12.76%
NJ 6.00% 12.74%
NM 6.31% 12.59%
SD 5.86% 12.58%
NH 0.00% 12.31%
HI 4.00% 12.04%
CT 6.00% 12.01%
VT 6.00% 11.27%
WI 5.60% 11.13%
DE 0.72% 10.88%
ME 5.00% 10.37%
ID 5.00% 10.16%
MT 0.00% 9.88%
NV 7.25% 7.97%

Source: Council on State Taxation

(Thanks to the PFF Blog for the pointer.)


Topics


Related Articles