Taxing Broadband Internet Services: A Bad Deal for Consumers

“Taxes,” observed Oliver Wendell Holmes, Jr., “are the price we pay for civilization.”   Some would eagerly add to that observation, but few would deny its fundamental truth.  Taxes provide the wherewithal to buy us goods, services and amenities that we cannot or likely would not purchase individually for ourselves.  Consumers, as taxpayers and beneficiaries of government-provided services, have a stake in the level of taxes and how government spends them.  The high level of tax compliance in the U.S. verifies citizens’ commitment to funding public expenditures.  That said, consumers are not indifferent to how funds are raised to finance government programs.  Most complain of the burden and would welcome shifting tax burdens to others.  Senator Russell Long characterized tax reformers as urging:  “Don’t tax you, don’t tax me, tax that fellow behind the tree.”  Consumers understand the direct incidence of taxes measured by the pain of paying them.  But, neither consumers, nor our representatives in government, generally understand the overall, direct and indirect economic burden of taxes.  This ConsumerGram is the first in a series addressing the economic costs of taxing Internet Services.  It begins with facts useful for context.

 

 

The Federal Internet Tax Moratorium Will Soon Expire

 

 

            President Clinton signed into law The Internet Tax Freedom Act in 1998.   Its purpose was to promote Internet access development by preventing state and local governments from “taxing the Internet.”  Congress imposed the tax moratorium out of a belief that taxes would raise Internet connection rates to consumers; reduce broadband development; and, accordingly, reduce the economic and political contribution of the Internet to other sectors and stakeholders.  In short, policymakers believed that the Internet creates enormous economic value for consumers much of which would be destroyed by Internet taxes.

 

            Congress is currently debating whether, and, if so, for how long the Internet Tax Moratorium should be extended.  State and local government officials correctly cited increasing public needs in the areas of education, health care, transport, fire or police protection and others. 

 

These officials insist that raising the necessary revenue may require raising taxes and/or cutting spending on other programs.  This could make the Internet a target for new taxes.  While none have committed to taxing the Internet” should the Moratorium be allowed to lapse, none have promised NOT to do so.  What choice is best for consumers – permitting Internet taxation or continuing the moratorium?  Understanding a few basic facts about the Internet can answer that question. 

 

A Handful of Broadband Internet Facts

 

            Broadband Fact One – Some contend that the U.S. has fallen behind other nations when it comes to deployment and use of broadband services.  Other experts disagree, but all sides concur that greater deployment and use of broadband is good for U.S. citizens and the U.S. economy.  Because increased taxes on the Internet would increase consumer prices and slow broadband development, an end to the tax moratorium would be a setback for the U.S. in terms of its international competitiveness.

 

Broadband Fact Two – Broadband Internet systems are subsidized by numerous government programs.  All fifty states and the District of Columbia have programs in place to promote broadband development.  Twenty-two states offer grants to support private sector deployment in underserved areas; seventeen offer grants to support broadband in rural areas; fifteen offer some form of broadband tax incentive; seven offer loans for broadband; eight use “universal service” mechanisms to promote broadband; and four offer “general” broadband grants.  A recent study found that 52 selected municipally-owned broadband networks received over $842 million in taxpayer funds over a twenty year period, and three-quarters of them are still receiving taxpayer dollars.  Several federal programs are rationalized as efforts to stimulate broadband technology and investment.  Ending the tax moratorium and higher broadband taxes will offset the value of these programs.

 

            Broadband Fact Three – Investors are reluctant to finance risky broadband investments.  Investment in broadband networks requires substantial capital outlays in a very risky market environment marked by uncertain returns.  Unlike public utilities, profits and cost recovery for competitive services are by no means assured.  No matter how well intended, government action may exacerbate risk, raise the cost of capital, and discourage investment in broadband networks.  Last year, Wall Street financial analysts told the US Senate Communications Subcommittee hearings on the role of government in markets for broadband services that the billions being spent by telcos to provide broadband services “…might not produce a profit.”

 

            From a survey of analysts’ views, we concluded in an earlier study that financial analysts’ and investors’ views about broadband investment vary from lukewarm to negative.  None are enthusiastic.  Shareholders and creditors alike express concerns about expected earnings, earnings growth and risk from construction of fiber, Internet access networks.  Investor doubts are fueled by the enormous capital outlays involved in building next-generation fiber networks.  Most analysts are quite skeptical; some are downright hostile; and, even the most optimistic are cautious about the payoff from massive capital expenditures for broadband networks.  Increasing taxes on users will lower returns to investors, discourage deployment and raise prices thereby making broadband services to less affordable to the average consumer. 

 

            Broadband Fact Four – Broadband networks are being encouraged worldwide as a spur to national economic development.  Broadband, high-speed Internet access has increasingly become the focus of developmental efforts and concerns.  Broadband access facilities are regarded universally as infrastructure essential for local, national and global economic development.  Leaders in the U.S., Europe, Japan, China and, indeed, in almost every other country are on record citing the importance of a role for broadband technology promotion in setting national priorities and policies.  The ITU and World Bank have issued numerous documents highlighting the value of broadband, Internet infrastructure as contributors to growth and welfare in developing economies.  However, taxes would clearly reduce direct and indirect economic benefits by increasing deployment costs and raising consumer prices.         

 

            Broadband Fact Five – The Internet creates enormous economic value for consumers much of which would be destroyed by Internet taxes.   Numerous studies by academics, think tanks, institutions and other stakeholders join to support a single conclusion:  The broadband Internet is a powerful stimulus to our social, political and economic wellbeing and ought to be encouraged.  There is also consensus that taxing the Internet would suppress its expansion, use, functionality and the degree to which it is capable of creating in other sectors jobs, higher incomes, greater productivity, less use of scarce natural resources (environment, space, energy, etc.) and other values too numerous even to list here. 

 

Don’t Tax the Internet!

 

            We at ACI are sensitive to increasing demands on state and local government resources and for expansion of current programs.  We recognize and understand that governments must raise revenue from other sources or suppress the growth of existing or new programs.  The alternative is to fund those programs and/or to forgo taxing other bases, using the proceeds from new taxes on the Internet.  That is a bad deal for consumers!  And, if consumers understood the implications, they would support extending the Federal Moratorium on Internet access.    

 

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The Institute is an independent public policy organization committed to providing information, analysis, and public policy research to the public for the betterment of American consumers.  The Institute is primarily comprised of volunteer public policy experts covering a wide range of issues.  For more information or to contact us, visit http://www.theamericanconsumer.org.

 

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Sources:

1. Robert D. Atkinson, “The Case for a National Broadband Policy,” The Information Technology and Innovation Foundation, June 2007.

2. Scott Wallsten, “Broadband Penetration: An Empirical Analysis of State and Federal Policies. Working Paper 05-12. Jun 2005.  Available at:  http://www.aei-brookings.org/publications/abstract.php?pid=949.

3. Larry F. Darby, “Consumer Welfare, Capital Formation and Net Neutrality:  Paying for Next Generation Broadband Networks”, Released by The American Consumer Institute, June 6, 2006, p. 18.  Available at:  http://www.aci-citizenresearch.org/Net%20Neutrality%20Study.pdf.

4. References to numerous ITU studies and data addressing the role of ICT and broadband in economic development are available on the ITU Development Sector (ITU-D) website at:  http://www.itu.int/net/ITU-D/index.aspx.

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