Treating internet as a public utility brings a new tax for new year

By: | Published: January 7, 2015 12:07 AM

The Federal Communications Commission is in the middle of a high-stakes decision that could raise taxes...

The Federal Communications Commission is in the middle of a high-stakes decision that could raise taxes for close to 90% of Americans. The commission is considering whether to reclassify broadband as a telecommunications service and, in doing so, Washington would trigger new taxes and fees at the state and local level.

The agency would like to make internet service a public utility, placing broadband under Title II regulation of the Communications Act of 1934. This move would make broadband subject to New Deal-era regulation, and have significant consequences for US taxpayers.

Under this decision to reclassify broadband, Americans would face a host of new state and local taxes and fees that apply to public utilities. These new levies, according to the Progressive Policy Institute (PPI), would total $15 billion annually. On average, consumers would pay an additional $67 for landline broadband, and $72 for mobile broadband every month, according to PPI’s calculations, with charges varying from state to state.

Proponents of broadband reclassification, including the left-of-centre organisation Free Press, claim that it would not result in higher taxes or fees. The recently extended Internet Tax Freedom Act, they assert, prohibits state and local taxation of Internet service. This is incorrect, however. The act does not apply to telecom-related fees.

Free Press and other broadband reclassification proponents also say the new taxes and fees can be prevented if the FCC designates broadband as an interstate service. A Progressive Policy Institute report explains why this also is incorrect:

“When the Commission previously considered the jurisdiction of internet traffic, it determined that such traffic was ‘largely interstate,’ but ‘jurisdictionally mixed.’ States routinely tax jurisdictionally mixed services that are classified as ‘interstate’ for purposes of regulation. For example, wireless services may not be regulated by state public utility commissions, but they are subject to a host of state and local taxes and fees. In several states, interstate wireless revenues are subject to taxation.”

Late last year, President Barack Obama waded into this contentious debate. He called for the internet to be treated like a public utility. Critics of Obama’s position point out this would reduce investment in infrastructure and lead to inferior service for consumers. Reclassifying broadband as a telecommunications service would also stifle innovation and restrict the openness of the internet.

The telecommunications industry has invested more than $1.2 trillion on broadband infrastructure since 1996. As a result, roughly 87% of Americans have access to broadband. It would be foolish for the government to discourage the significant investment required to maintain, expand and improve this infrastructure by subjecting broadband to circa 1930s regulation. Subjecting internet service providers to such onerous rules would depress innovation and penalise web users.

Not only would higher taxes and fees leave individuals, families and employers with less disposable income, a wealth of research indicates it would be bad for the economy.

John Hood, former president of the John Locke Foundation, found that keeping state and local tax and regulatory burdens as low as possible fosters economic growth, when he analysed 681 peer-reviewed academic journal articles going back to 1990.

“Most studies find,” Hood stated, “that lower levels of taxes and spending, less-intrusive regulation … correlate with stronger economic performance.”

Tax Foundation economist William McBride reviewed academic literature going back three decades and found, “While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions and monetary policy.”

In McBride’s survey of 26 studies, dating to 1983, he found “all but three of those studies, and every study in the last 15 years, find a negative effect of taxes on growth.”

The Federal Communications Commission is expected to make its decision early this year. After the more than 20 tax increases signed into law during Obama’s six years in office, the last thing American taxpayers need is a gusher of new taxes and fees triggered by bureaucrats in Washington.

Grover G Norquist & Patrick Gleason

Grover G Norquist is president of Americans for Tax Reform.
Patrick Gleason is the organisation’s director of state affairs

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