A recent ConsumerGram concluded that failure to extend the moratorium would allow state and local governments to tax Internet services, which would ultimately lead to higher consumer prices.  In other words, taxing the Internet would be a “bad deal for consumers.”  Last week, Congress introduced a bill to extend the Internet tax moratorium and to provide what Congressman John Conyers called “consumer and market fairness.”



Internet Tax Moratorium

The tax moratorium, originally signed by former President Clinton, will expire on November 1st unless Congress enacts an extension.  The failure to extend the moratorium would allow the states to place taxes on Internet services, including high-speed Internet access services.  In a recent ConsumerGram, Dr. Larry F. Darby, former Federal Communications Commission Common Carrier Chief and board member of the American Consumer Institute, argued for the need to continue Internet Tax Moratorium.  Dr. Darby pointed out that the Internet creates enormous economic value for consumers much of which would be destroyed by Internet taxes.  He stated, “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 ancillary economic benefits it produces.  A variety of studies have shown that the spread of the Internet, especially broadband service creates jobs, boosts incomes and productivity.  On the other hand, as Dr. Darby noted on CNBC’s The Call (Sept. 21, 2007), when it comes to taxing the Internet, “the science is absolutely clear,” adding “I am saying that consumers will give up jobs; they will give up income; they will give up lower prices.” 




Taxing Broadband Services Is Not Like Taxing Other Services

Studies show that broadband services are very price sensitive.  Higher taxes would lead to an increase in consumer broadband prices.  If prices increase, many lower income consumers would disconnect their broadband services and other consumers would defer subscription to high-speed Internet services.


Let’s illustrate what happens when taxes increase consumer broadband prices.  Assuming a 10% increase in broadband prices, empirical economic studies conclude that broadband demand would decrease by 20% and total broadband market revenues would decline by 12%.  Effectively, if prices go up, many consumers would shun high-speed services.  In turn, the decrease in consumer demand would lead a decrease in market revenue, which would discourage industry investment, and harm U.S. workers, economic development and international competitiveness.  In other words, raising Internet prices would have an adverse effect on consumers and the economy, whereas taxing a service that is not price sensitive would minimize economic damage by not significantly reducing demand.  Policymakers must, therefore, choose carefully what to tax and taxing the Internet would be bad news for consumers. 


Ending the Internet Moratorium Would Harm Consumers 

Representatives John Conyers (D-MI) and Chris Cannon (R-UT) have introduced a bill to extend the Internet Tax Moratorium and spare consumers from increased online taxes.  From our analysis, it appears that keeping taxes off the Internet would be a clear benefit to the economy by enabling a greater number of consumers to afford broadband services.  That would be good public policy.