All in the Public Interest: Part 3 – Telecom

We have all heard it all before — politicians are looking out for the “little guy.”   However, once these pro-consumer policies are enacted, they sometimes have adverse consequences on consumers and reduce consumer welfare.  In fact, they often have a disproportionate and negative impact on lower income consumers.  Our earlier articles provided examples of these unintended consequences as they relate to insurance and energy regulations.  Here are two more examples – ones that affect telecommunications and broadband consumers. 

Wireless Service Taxation

While Americans often pay 5 to 7% sales taxes on most goods and services they purchase, taxes on mobile phone services average 17%, including seven states where end-user wireless taxes exceeding 20%. 

For low-income consumers, wireless services are often the exclusive means to communicate and to connect to the Internet.  In fact, survey data finds that lower income, young and non-white consumers are most dependent on their mobile phones for communications.  Why do we tax what we should encourage? 

The irony could not be more apparent when comparing the local taxes between Baltimore City and Baltimore County.  In Baltimore City, residents earn almost half the income of residents in Baltimore County, but they pay an extra $4 per phone.  This means a discounted 5-phone wireless family plan in the city costs lower income consumers an extra $240 more per year than the neighboring county.  Lower income consumers just pay more.

Net Neutrality

Here is an example where numerous studies (many filed with the FCC) found that the imposition of Internet regulations would reduce consumer welfare, reduce network investment and lead to higher consumer prices.  But, the FCC seemed to have ignored these facts and is now attempting to impose Internet regulations.  

For one, these regulations could hurt the “little guy.”  By one estimate, 45% of the Internet traffic is consumed by 4% of Internet users.  Because these regulations could limit tiered and differentiated services, ordinary consumers may pay more to keep bandwidth hogs from paying their full share.  The rules would also prevent large web companies from chipping in to reduce consumer prices, though these companies contribute substantially toward network traffic and costs.  In effect, consumers who least can afford these services are forced to pay more.  The bottom line is that these regulations will make ordinary consumers pay more, so big data users can pay less.    

Conclusion

It is sometimes called the law of unintended consequences, where policies designed to do the right thing for consumers end up having adverse effects.  Just because taxes and regulations are placed upon businesses and corporations does not make consumers immune from their effects.  As this piece shows by example, increasing market costs can ultimately increase consumer prices.  The benefit of these policies to society can be illusory.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research.

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