TechKnowledge No. 14

Broadband Tax Credits: The High-Tech Pork Barrel Begins

By Adam D. Thierer
July 13, 2001

The following is a story about how an industry fell in love with a government program. It is an unusual love story in that it unites parties typically not on speaking terms with one another. On the other hand, this love story is eerily reminiscent of previous affairs between industry and government that ended up with less than happy endings. The industry in this case is the telecommunications and high-technology sector of the U.S. economy. The object of its affection: broadband tax credits.

Two bills, S. 88 and H.R. 267, both called the Broadband Internet Access Act of 2001, have been steadily gaining bipartisan support in Congress in recent months. With almost 60 cosponsors in the Senate and 170 cosponsors in the House, the measure appears ready to roll down the legislative track this session as either a stand-alone bill or a rider on a broader tax or spending proposal.

The measure would offer tax credits of 10 to 20 percent to companies that roll out broadband services to rural communities and “underserved” areas. A carrier would be eligible for a 10 percent credit for “current generation” broadband services (defined as a transmission rate of at least 1.5 megabits per second to the subscriber and at least 200 kilobits per second from the subscriber) deployed to such areas. Carriers would also be eligible for a 20 percent credit for “next generation” services (22 megabits downstream; 5 megabits upstream) they deployed to any residential consumer.

What explains the sudden infatuation with broadband tax credits? One possible explanation is that no other broadband policy measure appears likely to move this session. Consensus has always been hard to come by when it comes to the contentious issue of telecom industry regulatory policy. This has never been more true than today as a massive—and astonishingly confusing—advertising war between major industry players continues to play itself out on radio, TV, and in newspapers, on an almost daily basis. Meanwhile, on Capitol Hill, armies of lobbyists engage in an ongoing war as they attempt to advance competing broadband policy bills. This melee has become the telecom industry’s equivalent of a Cold War-esque “mutual assured destruction” (or “MAD”) policy, with its seemingly endless escalation of spending on advertising and lobbying efforts to advance or halt the movement of regulatory legislation. The result has been perpetual gridlock, but still the lobbying battle intensifies.

But while telecom’s regulatory MAD war rages on, a temporary truce has been declared on the tax incentive front since it appears that no party has anything to lose by supporting government intervention of this sort. Everyone seems to be at ease with the idea as long as they have a space reserved in line at the tax credit trough. Few can find fault in a proposal that offers any provider a chance to receive an implicit subsidy for rolling out new services to rural America. But there is a downside associated with broadband tax credits. Among the problems with the concept are the following:

Tax credits do not address the fundamental obstacle to more rapid broadband deployment—the highly uncertain legal environment providers face today. The current regulatory quagmire the American telecom sector finds itself in is confusing mish-mash of complex operating standards; overlapping jurisdictional governance; asymmetrical regulatory policies; and, uneven tax treatment relative to other industries. Congress is passing the buck on these difficult issues and hoping to appease the industry, the stock market, and the public in the short term by offering broadband tax credits as a silver bullet solution to America’s broadband woes. This policy placebo will not work.

Tax credits are not likely to catalyze as much deployment as policymakers hope for. In the absence of the fundamental reforms discussed above, many providers are unlikely to significantly increase deployment efforts. While a 10 to 20 percent tax credit may help offset some of the capital costs associated with network expansion, many carriers will still be reluctant to deploy new services unless a simple and level legal playing field exists. For example, if outmoded regulatory quarantines (such as Inter-LATA rules for the Baby Bells) or burdensome line-sharing requirements (for the Bells or cable carriers) are applied to broadband offerings, then it is unlikely those carries will want to deploy services even if tax credit incentives are available.

Tax credits are unnecessary in an environment of proliferating choices. An upcoming Cato Institute study by telecom consultant Wayne Leighton reveals that service options in the broadband marketplace are growing rapidly and that Americans are gaining access to broadband services at a much faster rate than previous technologies. In an environment of proliferating consumer choices, policymakers should exercise patience and allow the deployment process to play out naturally.

Tax credits could be more advantageous to one set of providers or technologies than another. Does it really make sense to try to “wire America” once again when more cost-effective wireless technologies might prove superior over time? This is not an argument for an industry policy favoring wireless providers and technologies, rather, it is warning about the unintended consequences of providing tax credits at a time when wireline providers and technologies are likely to be the politically favored technology in the short-term.

Tax credits could become an expensive and perpetual Washington entitlement program similar to previous industry subsidy schemes such as the Rural Utilities Service (RUS). Spawned during the New Deal to electrify America (a task accomplished by the mid-1950s), the Rural Electrification Administration (REA) lives on, albeit with a new name and mission. Today the RUS is already offering broadband loans to telecom providers. The new broadband tax credit proposal will simply pile another, and potentially more expensive, burden on the American taxpayer.

Tax credits will politicize a dynamic industry by allowing federal regulators to become more involved in how broadband services are provided. By inviting the feds to act as a market facilitator, the industry runs the risk of being subjected to greater bureaucratic micromanagement since that which government subsidizes it often ends up regulating too. Broadband tax credits might eventually lead to a wide array of concurrent regulatory requirements such as broadband “build-out” requirements or timetables, which have already been proposed in conjunction with other broadband bills. It is not hard to imagine that such tinkering with the daily affairs of industry might become more commonplace if Washington starts subsidizing broadband deployment.

That explains why T.J. Rodgers, president and CEO of Cypress Semiconductor, has cautioned the high-tech industry about “normalizing relations” with Washington, D.C. As Rodgers says, “The political scene in Washington is antithetical to the core values that drive our success in the international marketplace and risks converting entrepreneurs into statist businessmen.” The high-tech sector should think twice before entering into this pact with Washington. The allure of broadband tax credits may seem too good to pass up, but as with any deal with the Devil, there’ll be hell to pay once the honeymoon is over.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.