You’ve Got Taxes! Ban on Internet Taxation Expires November 1
PRI Policy Update
By: Daniel R. Ballon, Ph.D
10.25.2007
For more than 200 million Internet users, the real fright this year could come the day after Halloween. On November 1, a law forbidding state and local governments from taxing Internet access will expire, potentially inflating the cost of broadband subscriptions by up to 30 percent.[i] Decreasing the affordability of broadband will disproportionately affect the poor, discourage investments in new technology, impede economic growth, and handicap America’s competitiveness in the global economy.
In 1998, Congress passed the Internet Tax Freedom Act (ITFA) to “establish a national policy against Federal and State regulation of Internet access.”[ii] Congress twice renewed its commitment to a tax-free Internet in 2001 and 2004. By now the benefits of this prudent policy should be clear to all observers. The digital revolution has driven nearly all economic growth over the past decade and contributes $2 trillion annually to the U.S. economy.[iii] According to a recent study, increasing a state’s broadband penetration by just one percent translates to an increase of 300,000 jobs.[iv]
- Internet Tax Freedom Act prevents state and local governments from taxing Internet access
- Internet taxes will reduce consume demand for broadband, slowing investments in new technology and the deployment of faster networks
- Taxes will disproportionately affect customers in rural and low-income areas, creating barriers to ubiquitious broadband deployment.
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In pushing for authority to tax broadband access, shortsighted state and local governments fail to consider the consequences of interfering with the Internet economy. If broadband expansion stalls, the resulting loss of high-wage jobs will deprive these governments of substantial property, sales, and income-tax revenue. Critics of Internet tax freedom argue that taxation will affect neither demand for broadband nor its deployment, but this assertion defies common sense and significant evidence to the contrary.
The U.S. Department of Commerce found that cost is “the most obvious factor limiting broadband demand today.”[v] An analysis by economists at the University of Texas further confirmed that “broadband price is indeed a statistically significant driver of broadband demand.”[vi] A tax would not only decrease demand for broadband service, but a recent study finds that suppliers in medium-sized markets “would choose to delay the diffusion of broadband in those markets.”[vii] Therefore, a single Internet access tax could trigger a domino effect, decreasing consumer demand, broadband availability, and the incentive to develop faster, more advanced networks.
An AEI-Brookings joint study estimates that for every one percent increase in the price of broadband, consumer demand could drop by 1.5 percent.[viii] If the average taxes, fees, and surcharges currently levied on telephone and wireless services are used as an indicator (see excellent report from The Heartland Institute[ix]), Internet access taxes could shrink the broadband market by 25 percent. ITFA opponents dispute this assertion, pointing to a May 2006 Government Affairs Office (GAO) report, which found that states with access taxes (taxes existing before 1998 were grandfathered by ITFA) do not suffer from reduced rates of broadband adoption or deployment.[x] However, these rates were frozen around five percent[xi] and are not an accurate representation of fees that might be levied if the moratorium expires.
In the rapidly expanding wireless market, for instance, the Cellular Telephone and Internet Association found that taxes on cellular services have “increased nine times faster than the rate on other taxable goods and services.”[xii] This excessive taxation has been estimated to repress the wireless industry’s growth by at least 10 percent.[xiii] If the ITFA expires, a barrage of hidden surcharges, taxes, and fees will accumulate on customers’ broadband bills. Similar small charges currently add up to 20 percent to the price of landline telephone service. Many of these taxes have innocuous names that mask their true intent.
For example, until last year customers were charged a three-percent “excise tax,” a “temporary” fee implemented by Congress in 1898 to finance the Spanish-American War.[xiv] These fees will reduce demand, delay broadband deployment, and disproportionately affect customers in rural and low-income areas.
President Bush and congressional leaders have recognized the importance of bridging the “digital divide,” which hinders access to technology in underserved communities. In their “Innovation Agenda,” House Democrats recognize that “affordable access to broadband technology for all Americans” will “dramatically increase the productivity and efficiency of our economy.”[xv] If Congress allows the ITFA to expire, however, the digital divide will widen.
According to the GAO, households with incomes above $100,000 are six times more likely to have broadband access than households with incomes below $30,000, and urban households are twice as likely to have broadband access as rural households.10 A Yankee Group survey reveals that price is unequivocally the highest barrier to broadband adoption by rural and low-income customers.[xvi]
As a flat percentage of monthly broadband costs, access taxes will raise prices for all consumers. As a percentage of monthly income, however, these regressive taxes will disproportionately target the poor. Groups such as the Rainbow PUSH Coalition support extending the ITFA because “Internet access taxes will be detrimental to groups that have benefited from affordable broadband packages.”[xvii]
In the absence of Internet access taxes, the digital divide is beginning to close. According to the Pew Internet and American Life Project, broadband adoption in the past year grew by 43 percent for households earning less than $30,000, 24 percent for residents of rural areas, and 29 percent among African-Americans.[xviii] The Federal Communications Commission reports that high-speed Internet availability in the least densely populated zip codes has increased nearly 4-fold since 2000.[xix] Internet taxes threaten to reverse this progress, potentially costing the U.S. economy $10 billion and 61,000 jobs per year.[xx]
Ensuring affordable access to broadband is not only critical for economic growth, but also for maintaining America’s competitiveness on the global stage. According to the Organisation for Economic Co-operation and Development (OECD), America has fallen from fourth to fifteenth in broadband penetration among 30 OECD member nations since 2001.[xxi] Average broadband speed for American consumers is 20–30 times slower than comparable services in Japan and South Korea.[xxii]
The Internet serves as a platform on which the next major innovations in commerce will be built. Without a robust and competitive infrastructure, every sector of the economy, from healthcare to entertainment, will suffer. The threat of taxation only creates uncertainty in demand, deterring crucial investments in wider and faster broadband networks.
The ITFA is a rare example of Congress thinking outside the box. Few challenge the success of the ITFA in promoting growth of the digital economy. Those who desire continued growth should support a permanent ban on Internet access taxes. This does not preclude tax proponents from revisiting the issue, but it shifts the burden of proof. Rather than requiring ITFA supporters to restate the case against Internet taxation every few years, the law should make it incumbent on tax supporters to demonstrate that circumstances have changed.
This is a significant concern, given that the legislation grandfathers preexisting Internet taxes. If Congress delays renewal of the ITFA, new taxes passed in the interim will likely be preserved. In Montana, for example, an “excise tax” on Internet access is already on the books, but state tax forms include a footnote that “these charges are not subject to the retail telecommunications excise tax at this time.”[xxiii] The ITFA protects consumers from these charges, and from other fees for incidental services such as e-mail and instant messaging. Absent these protections, state and local governments will be limited only by their creativity in taxing Internet applications.
On October 16, in a nearly unanimous vote, the House approved a four-year extension of the ITFA. This is despite the fact that legislation for a permanent tax ban sponsored by Rep. Anna Eshoo (D-Menlo Park) was co-sponsored by 242 out of 435 House members. House leaders invoked special rules to thwart the majority’s will, and prevent action on a permanent ban. The Senate is considering competing bills for either an extended or a permanent ban. Time is running out, however, before the Internet becomes open for taxation on November 1.
Daniel Ballon is a Policy Fellow in Technology Studies at the Pacific Research Institute. He can be reached via email at dballon@pacificresearch.org or by phone at (415) 955-6117.
[i] David McClure, Internet Access Taxes and Broadband Deployment in America, U.S. Internet Industry Association, September 25, 2007. [ii] Internet Tax Freedom Act, H.R. 4105, 105th Congress, 2nd Session. (1998). [iii] Robert Atkinson and Andrew McKay, Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, The Information Technology and Innovation Foundation, March 2007. [iv] Robert Crandall, William Lehr, and Robert Litan, The Effects of Broadband Deployment on Output and Employment: A Cross-Sectional Analysis of U.S. Data, The Brookings Institution, July 2007. [v] Understanding Broadband Demand: A Review of Critical Issues, U.S. Department of Commerce, Office of Technology Policy, September 23, 2002. [vi] Kenneth Flamm and Anindya Chaudhuri, An Analysis of the Determinants of Broadband Access, Telecommunications Policy Research Conference, October 2005. [vii] Austan Goolsbee, The Value of Broadband and the Deadweight Loss of Taxing New Technology, January 2006. [viii] J. Gregory Sidak, Robert Crandall, and Hal Singer, The Empirical Case Against Asymmetric Regulation of Broadband Internet Access, Berkeley Technology Law Journal, Vol. 17, No. 3, Summer 2002, pp. 953–987. [ix] David Tuerck, Paul Bachman, Steven Titch, and John Rutledge, Taxes and Fees on Communication Services, The Heartland Institute, May 2007 (rev. June 2007). [x] GAO-06-426, Broadband Deployment is Extensive throughout the United States, but it is Difficult to Assess the Extent of Deployment Gaps in Rural Areas, Government Accountability Office, May 2006. [xiii] Scott Mackey, “Roaming with…Wireless Taxes: Why They Matter to the Entire U.S. Economy,” Cellular Telephone and Internet Association, Summer 2006. [xiv] Paul Davidson, “Feds Cut Off Phone Tax After 108 Years,” USA TODAY, May 26, 2006. [xvii] Jesse Jackson, Sr., Letter to House Republican Leader John Boehner, October 1, 2007. [xviii] John Horrigan and Aaron Smith, Home Broadband Adoption 2007, Pew Internet and American Life Project, June 2007. [xix] High Speed Services for Internet Access: Status as of June 30, 2006, Wireline Competition Bureau, Federal Communications Commission, January 2007. [xx] Robert Crandall, Charles Jackson, and Hal Singer, The Effect of Ubiquitous Broadband Adoption on Investment, Jobs, and the U.S. Economy, Criterion Economics, LLC, September 2003. [xxii] Blaine Harden, “Japan’s Warp-Speed Ride to Internet Future,” Washington Post, August 29, 2007. |
