Cell phone taxes: Why so high?

How to protect your pockets.
Feb. 16 2011 7:16 PM

Cellular Sin Taxes

Why are mobile phone taxes so ridiculously high?

Cell phone. Click image to expand.
Why are cell phone taxes so high?

A couple of years ago Bob McIntyre bought his daughter a mobile phone. She was living in Oakland, Calif., at the time, and McIntyre lived in northern Virginia. He told her to buy the phone in Oakland and to send him the bill. With rebates and discounts the phone ended up costing about $25. But when McIntyre got the bill, he hit the roof.

McIntyre, I should point out, is director of Citizens for Tax Justice, a liberal nonprofit. CTJ has a well-established reputation for scrupulously honest research—McIntyre's been tutoring me about tax distribution tables for three decades—and the man doesn't waste a lot of time griping that our wallets have been picked clean by the gol-durned guv'mint. (That's Grover Norquist's racket.) But McIntyre was flabbergasted to receive a bill of nearly $60 for his daughter's cell phone, of which the majority was taxes. The city fathers of Oakland had calculated their tax based on the phone's sticker price of about $300. Consequently, McIntyre ended up paying more for the tax than he did for the phone.

Taxes on mobile phone use are so high that you might wonder whether the government considers their use a vice, like the consumption of alcohol or tobacco. A pack of smokes costs about $5, on top of which state tax will add, on average, $1.45. That's an average tax rate of 22 percent. In the states of Nebraska, Washington, or New York—where taxes on cellular service are highest—the combined state and local tax is 18 or 19 percent, which isn't too far behind. Nationwide, the average state-local tax burden on cell phone service is 11 percent, compared with an average general sales or use tax of only 7 percent.

Federal taxation of cigarettes (a federal excise tax of about 25 percent is built into the price of a pack) is much more onerous than federal taxation of cell phone use (a 5 percent surcharge paid into the Federal Communication Commission's Universal Service Fund, which subsidizes schools, libraries, hospitals, and rural providers). But when combined with state and local taxes on mobile phone service in Nebraska, Washington, or New York, the total tax burden is 22 or 23 percent. Nationwide, the combined federal-state-local tax on cellular phone service averages 16 percent.

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Why are mobile phones taxed so much? A new analysis by Scott Mackey, a Vermont-based economist who works for wireless providers, lays into the FCC, which since 2007 has raised its USF surcharge from 4 to 5 percent. (I'm relying on Mackey for all my cell phone data.) But state and local taxes on cell phone use average more than twice this federal surcharge. And Mackey points out that during the recession local governments have been bumping up their taxes on cellular phone service as they scramble to replace lost revenue. Baltimore went from $3.50 to $4 per month. Montgomery County, Md., went from $2 to $3.50. (Neither of these calculations includes county 911 fees, nor, of course, other state and federal fees.)

Flat-rate taxes on the purchase of goods or services are by definition regressive. That's why states typically keep sales taxes below 10 percent. But the nationwide average tax on cell phone use is, again, 16 percent. That is largely, I would guess, a relic of the time (a dozen years ago?) when cell phones were still a luxury item. It wouldn't have seemed especially regressive to tax somebody's Nokia back when audiences were flocking to see Titanic. But today cell phones are ubiquitous. Although 25 percent of American households have no land lines, only 2 percent have no phone service at all, according to the Pew Foundation's Internet and Life Project. Families too poor to have a land line usually have at least one cell phone. Increasingly, that phone is a smart phone; according to another Pew study, 17 percent of families earning less than $30,000 rely on a cell phone to access the Internet.

As McIntyre often points out, the federal income tax is superior to most state taxes because it's progressive. Rich people pay a larger percentage of their income in taxes than middle-class people, middle-class people pay a larger percentage than poor people, and the poorest people pay no income tax at all. Indeed, they may achieve a net income gain through the Earned Income Tax Credit. That's the way it's supposed to work, anyway; assorted deductions and exemptions and other loopholes undo progressivity a bit. (McIntyre can tell you about that, too.) When the federal and state governments need revenue it's generally not a good idea for them to jack up taxes on goods and services. Far better that they do it through federal and (in the 43 states that have them) state income taxes.

The only logical reason to maintain the current tax scheme would be to discourage cell phone use. That's why we have sin taxes on unhealthy stuff like Marlboros and Coca-Cola. But cell phones aren't unhealthy (except if people use them while driving—already banned in eight states, and for novice drivers in 28—or engaged in some other activity where multitasking is unsafe). And except in certain situations (in class; at the dinner table, the movies, or a funeral; on Amtrak's quiet car; perhaps in bed with your spouse) cell phone use is perfectly acceptable. It's wonderfully convenient, even fun! If we're going to chide cell phone providers—as we should—for adding sneaky fees to your bill, we mustn't ignore the government when it does the same.

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Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.