January 23, 2012

Wireless Taxes and Fees: A Tragedy of the Anticommons

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Combined federal, state, and local taxes on wireless services are about twice as high as the average retail sales tax. While the normative justification for above-average taxation of wireless service is weak, there is a compelling public-choice explanation: The mobile service tax base appears to suffer from a tragedy of the anticommons. That is, multiple parties have the power to block or partially block access to a resource, resulting in underutilization of the resource.

Numerous overlapping tax authorities seek to obtain revenues through wireless-service taxation, and this may lead to overexploitation of the tax base. 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.

In this paper, the authors use state-level data from three years to examine the possible economic, demographic, and political factors that might explain the variation in tax rates on wireless services. The authors find that wireless tax rates increase with the number of overlapping tax bases.