The Beatles were so perturbed by the taxman they wrote a
song about his omnipresence in 1966. It went something like this: “If you drive
a car, I’ll tax the street. If you take a walk, I’ll tax your feet.” In their
day, it would seem, nothing escaped the taxman.
it would be tax free. That’s because Congress has held the taxman at bay for
the past nine years. It first declared a moratorium on Internet taxation in
1998 and has extended it twice since then. The ban, however, is set to expire again
next month, and a debate over its value is heating up on Capitol Hill.
The House Small Business Committee held a hearing on
the subject on Wednesday (Oct. 3). It largely drew supporters of a bill that
would make the moratorium permanent. But is that in the best interests of small
businesses, not to mention the nation?
The question might seem academic. Nobody likes taxes. But two
recent studies argue that the moratorium is misguided and that imposing taxes would
have little effect on the growth of the Internet, e-commerce or those who go
The Center for Budget and Policy Priorities (CBPP), a
non-partisan organization that examines the effects of government policy on
low-income households, claims in one of the studies that a permanent moratorium is actually more likely
to be counterproductive to expanding Internet access, especially among
local governments play a critical role in providing many low-income individuals
with their first hands-on exposure to the Internet in public schools,
libraries, and community centers,” it states. “Depriving states and localities
of revenue through a permanent [moratorium] would interfere with their ability
to take these kinds of initiatives.”
That position meshes with the findings of a second study by the Pew Internet &
American Life Project, a subsidiary of the Pew Charitable Trust. It found that
price was a statistically insignificant factor in decisions by households to
purchase broadband Internet service.
be sure, more competition, lower prices, and greater availability of faster
infrastructure will be welcomed by American consumers. By themselves, however,
they are not likely to be enough to lure non-online users off the digital sidelines,”
the Pew study noted.
the moratorium was first enacted nine years ago, it was clearly meant to be
temporary. The idea was to give Internet access
providers and state and local officials time to come up with a uniform approach
to Internet taxation. Back then, the Internet was also still a nascent service
that may have needed tax incentives to grow. But that dynamic has changed.
Pew survey, conducted in February, noted that it would likely take only nine years
for high-speed Internet service to reach half the population. In contrast, it
took 10 years for the compact disc player to reach 50 percent of consumers, 15
years for cell phones, and 18 years for color TV.
Overseas, every country that leads
the United States in broadband deployment and usage currently taxes broadband
service, “often at rates two to three times higher than the typical combined
state and local sales tax rates.” according to CBPP study. “This demonstrates
that reasonable, nondiscriminatory taxation of Internet access service is no
barrier to healthy rates of deployment and household subscriptions,” it concluded.
Domestically, states that had Internet taxes on the books in
1998 were grandfathered under the moratorium and allowed to continue imposing
the levies. In those states, broadband service is comparable to states without
taxes. The CBPP study notes that Verizon is rolling out its new fiber optic Internet
service in states that levy Internet taxes as well as those that don’t. What’s more prices are about the same, although they are substantially higher in all cases than services offered in Europe, which are typically faster.
The point here is that substantial evidence exists to make a
persuasive argument against continuing the moratorium. My major concern is that
the debate will focus excessively on the issue of taxation, and not on the
broader issues involving how broadband is being deployed in what amounts to a duopoly
If lawmakers intend to extend the moratorium, they need to tie
it to specific commitments from service providers that address shortcomings in
the current level of service. That includes providing a plan to lower costs and
improve services to small businesses and rural households and other underserved
areas of the country.
After all, there is no such thing as a free lunch, and
extending the moratorium (forget about making it permanent) without some
guarantee of better service would be tantamount to a tax giveaway. And, the
nation can ill afford that.