Tax Rascal

Did New Jersey Tax Verizon Into Becoming a Monopolist?

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Did New Jersey Tax Verizon Into Becoming a Monopolist?

Via MauledAgain, I found a fascinating story about New Jersey’s tax on telephone poles owned by the ‘dominant provider’ in the state. As Maule points out, it’s a hard law to understand: it’s not just about revenue or beautification, because this would apply to taxing any phone company, not just the largest. He adds:

One wonders why a tax would be imposed only on the dominant provider. Was it an attempt to disadvantage the market leader in order to boost the competition and level the playing field? It is a rather interesting way to spread the wealth. Imagine an income tax imposed only on the largest software company, the biggest bank, the top-paid baseball player, and so on.

Why should New Jersey think twice before imposing such a tax? The worst scenario is a “race for second place”. Imagine that this tax works out to a tax of 5% on a company’s income. Now, imagine that in New Jersey, Verizon makes $100 million each year (before the tax), and AT&T makes $96 million (again, before the tax). If Verizon finds a way to blow a little more than $4 million, so they earn less than AT&T, they can dodge the tax. But then AT&T can take the same action — if they earn a little less than that, then they can avoid the tax.

When would it end? The only stable situation is to have one firm that really is dominant: a company that makes so much money that it can’t come out ahead by moving to second place. Since the telecom business moves pretty gradually, it would be hard for someone to leapfrog a competitor: the only way to become dominant is to be a close second-place finisher, first. And if that happens, the race for second place is on.

So whatever the intentions of New Jersey’s tax law, their tax on dominant providers has actually made dominant providers more likely to get that way and stay that way. If there’s an award for the most counterproductive tax possible, New Jersey is on the short list for winning it.

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