Don't Tax Broadband In Order To Subsidize It

[Commentary] The Federal Communications Commission recently proposed amending its low-income “Lifeline” program -- which provides a $9.25 per month credit for consumers of voice services -- to permit recipients to apply that same subsidy instead to broadband services. Who could argue against increasing options for low-income Americans? Before critiquing the FCC’s proposal, it’s important to point out that expanding broadband access is a laudable goal. But financing this expansion through the Lifeline program will eventually lead to the perverse outcome of taxing broadband in order to subsidize it. Better to raise the funds for subsidized broadband from taxes imposed on behavior we want to discourage.

The current base of revenues -- interstate voice services -- are under siege as consumers increasingly obtain voice service as a free add-on to a wireless broadband data package. To raise the funds to make a real dent in the number of disconnected homes and improve lives, the Lifeline revenue base likely would have to be expanded to include broadband services. But for the same reason we would never finance a general R&D subsidy by taxing firms engaged in general R&D, it makes no sense to tax broadband in order to subsidize it. Indeed, for those 10 to 20 million non-adopting households that would come aboard in response to a modest subsidy, there are likely millions of price-sensitive broadband households that would leave the broadband market in response to a modest tax. Unlike interstate voice revenues, which are paid in part by businesses, fixed broadband revenues are overwhelmingly paid by residential consumers. Thus, bringing broadband into the revenue base would cause US households to bear a larger burden of the universal service subsidy.

[Hal Singer principal at Economists Incorporated, a senior fellow at the Progressive Policy Institute, and an adjunct professor at Georgetown University’s McDonough School of Business]