Study Estimates $15 Billion Tax, Fees Increase Under Title II

Communications Act Title II opponents seized on a Progressive Policy Institute study’s estimate Monday that reclassifying broadband would create $15 billion nationally in new federal, state and local taxes and fees, and predicted it would dampen public enthusiasm for basing net neutrality rules on Title II. The “sleeping giant has been awakened, and once the size of the fee increases becomes more widely understood, I think consumers will react,” said Free State Foundation President Randolph May.

Reclassification not only would require broadband providers to begin paying into the USF, but also would subject broadband to state and local taxes and fees that would be passed on to consumers, said PPI Senior Fellow Hal Singer and Brookings Senior Fellow Robert Litan in the study. PPI opposes a Title II approach. Raising fees and taxes would run counter to the FCC goal of making broadband more widely available, they wrote.

The study is a “scare tactic,” said Free Press Policy Director Matt Wood, a Title II proponent. He argued the FCC could forbear from requiring broadband providers to pay into the fund. Even if it didn’t, requiring the payments alone would not increase USF spending or require consumers to pay more, he said. “If broadband revenues were assessed but the fund size stayed constant, consumers would pay on broadband but, as a result, they'd pay less on their other services like wireless and wired voice.” The agency could also pre-empt states from extending taxes and fees to retail broadband, he said. Congress can also extend an exemption on state sales taxes on the Internet, he said. PPI has "gone from one scare tactic to another, but all of them fall apart upon examination,” Wood said. “PPI's scaremongering on behalf of its paymasters is not productive."

Title II proponent Public Knowledge Vice President Michael Weinberg discounted linking a Title II approach with increased taxes and fees, saying the question of whether broadband providers should pay into the USF “has little to do with net neutrality.”The agency may consider that question, separate of net neutrality, he said. Weinberg said the commission in August asked the Federal-State Joint Board on Universal Service to examine USF contribution reform (see 1408080032). As Title II becomes more of a possibility, opponents are doing more to try to "tarnish" it, Weinberg said.

Litan, in an email, said the study estimated that 90 percent of the increased taxes and fees would come from increases in a variety of state and local charges, including franchise fees and those supporting state-based universal service funds. If broadband is reclassified, “it would be nothing for some state tax department bureaucrat” to begin collecting from broadband providers the same taxes and fees collected from other telecom providers, Singer said. “They need these revenues,” Singer said, of state and local governments. “They can’t help themselves.”

The study estimated state and local taxes and fees would rise by an annual average of $67 for wireless and $72 for wireline customers. The federal tax increase would average $17 per household annually. Since a household could have several wireless accounts, the impact could be “significant,” Singer said. Increasing access to broadband through USF is laudable, Singer said, but it should be paid for through an income tax or other form of raising revenue that doesn't increase the cost of Internet access.

The new broadband fees would be on top of the potential 16-cents-a-month increase in FCC Chairman Tom Wheeler’s proposed order to raise the annual E-rate spending cap by $1.5 billion, the study said. The commission is scheduled to take up the order at its Dec. 11 meeting (see 1411170042). Weinberg said whether to increase the spending cap is unrelated to net neutrality.

The study follows comments by commissioners Mike O’Rielly and Ajit Pai that a Title II approach would mean broadband providers would have to pay into the USF. Wheeler also told public interest advocates hours after President Barack Obama endorsed reclassification that one of the questions the agency needed to sort out in a Title II approach is whether broadband providers would have to pay into the USF (see 1411140059). The FCC declined to comment Monday on the study.

The study “is being conservative” in estimating the potential federal fee increase, because adding broadband could be an impetus to increase USF spending, said TechFreedom President Berin Szoka, another Title II opponent. Increasing the number of people paying into the fund by adding broadband would lower the USF contribution rate from 16.1 percent to 5.8 percent, the study said. Because any increase in USF spending would be a smaller percentage increase with the addition of broadband, Szoka said, it's "hard to see why the FCC would stop at the $1.5 billion in new E-rate spending. ... If a Democrat wins the White House in 2016, the next FCC chairman will almost certainly find new ways of increasing USF spending."

The study adds “to the evidence that reclassification is poorly understood by its advocates,” said George Ford, Phoenix Center chief economist. The “‘tax’ implications are only a part of the ugly-side of reclassification, which is why Chairman Wheeler, who is being advised by experts, is trying desperately to avoid it," emailed Ford. "The President's position on reclassification appears to me to be a consequence of an ignorance of and poor advice regarding communications law.”