As the first hurricane moves along the U.S. coast, there is another potential catastrophe coming and it’s not really on anyone’s radar.
On the one hand, the FCC is looking to impose net neutrality regulations in the name of protecting the open Internet, even if it means reclassifying the Internet as a regulated public utility. At the same time, the Internet Tax Moratorium, which prevents state and local governments from imposing new taxes on Internet access services, is set to expire on November 1, 2014. Unknown to most pundits and policymakers, the confluence of these two issues could lead to devastating consequences that will inhibit Internet investment, significantly increase consumer broadband prices, and decrease service subscribership.
Completely ignored from these policies discussions, however, is the fact that reclassifying ISP services to common carrier-style telecommunications regulation would expose broadband services to existing state and local tax laws that are specifically designed to target “regulated” and “telecommunications” services.
For example, broadband service revenues, by virtue of being classified as a regulated service or a telecommunications service, could now be subject to the same receipts-based taxes imposed upon utility services in many states, effectively adding new costs to consumer broadband services. Similarly, under existing laws, reclassification could expose broadband infrastructure to additional state and local property tax burdens, effectively discouraging network investment. If we just consider the tax consequences of reclassification, the effect on broadband consumers could be devastating, since these costs mean higher prices for consumers.
In addition, since many state and local governments tax regulated telecommunications (and public utility) property and services at much higher rates than other commercial businesses property and services, the reclassification has the potential to expose broadband service providers and the services they provide to higher taxes. The tax increases would inevitably be passed along to consumers in the form of higher broadband prices.
A few years back, the Heartland Institute estimated that telecommunications consumers were paying more than 17 percent in service taxes and fees. Now, with reclassification, these costs will eventually make their way to broadband consumers. The increased broadband prices would reduce broadband demand and lower consumer welfare – precisely the opposite goals of the National Broadband Plan, both in terms of affordability and online adoption.
At the same time that this is happening, the Internet Tax Moratorium is set to expire, which would allow state and local governments to impose new and additional taxes on broadband access. If the current state and local taxes imposed on wireless service consumers are any indication of what is to befall broadband consumers, state and local taxes will rise significantly and so will broadband costs. Today, wireless taxes already exceed taxes on other telecommunications services, with consumers living in six states paying more than 20% in taxes on their wireless bills or about three times the rate of sales taxes. The combination of FCC reclassification and the expiration of the Internet moratorium will mean the end of the growing Internet as we know it. It will be the perfect storm.
By my estimate reclassification and end of the moratorium would eventually increase broadband prices by more than 17 percent, due to increases in state and local taxes traditionally imposed upon telecommunications and utility services, including property and receipts-based taxes. The increase in costs, when passed through to consumers in the form of higher prices, will lead to a decrease in the otherwise growing base of nationwide broadband subscribers by as much as 65 million by 2020.
This decrease in subscribership would affect economic output by reducing Gross Domestic Product by as much as a quarter of a trillion dollars over the next 10 years, including the loss of a half a million jobs. Finally, the effect of price increases and demand services would produce a decrease in consumer welfare by as much as $81.1 billion over the next ten years for the broadband services market. Lower levels of investment, higher prices and reduced demand are precisely the opposite outcomes that Congress and the FCC have set out to achieve in the National Broadband Plan. In short, allowing the moratorium to expire and reclassifying broadband services – would do more to make broadband unaffordable, which will discourage broadband adoption and lower consumer welfare.
Given the potential downside from the risk of increased Internet regulation and taxes, policymakers need to prevent this confluence of events. Congress is mulling over the Permanent Internet Tax Freedom Act, which would extend the tax moratorium indefinitely. On the Net Neutrality issue, the FCC needs to take a break from writing and promulgating new Internet regulations, at least until they can identify some serious violation that would require some regulatory remedy, rather than anticipating the potential for market failure. These actions would provide broadband consumers with adequate shelter from the storm.
Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit education and research organization. He is a member of the FCC’s Consumer Advisory Committee, but these views are solely his own and not necessarily that of the committee or its members. For more information about the Institute, visit www.theamericanconsumer.org.