Broadband Tax Credits: The High‐​Tech Pork Barrel Begins

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The following is a story about how an industry fell in love witha government program. It is an unusual love story in that it unitesparties typically not on speaking terms with one another. On theother hand, this love story is eerily reminiscent of previousaffairs between industry and government that ended up with lessthan happy endings. The industry in this case is thetelecommunications 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 BroadbandInternet Access Act of 2001, have been steadily gaining bipartisansupport in Congress in recent months. With almost 60 cosponsors inthe Senate and 170 cosponsors in the House, the measure appearsready to roll down the legislative track this session as either astand-alone bill or a rider on a broader tax or spendingproposal.

The measure would offer tax credits of 10 to 20 percent tocompanies that roll out broadband services to rural communities and"underserved" areas. A carrier would be eligible for a 10 percentcredit for "current generation" broadband services (defined as atransmission rate of at least 1.5 megabits per second to thesubscriber and at least 200 kilobits per second from thesubscriber) deployed to such areas. Carriers would also be eligiblefor a 20 percent credit for "next generation" services (22 megabitsdownstream; 5 megabits upstream) they deployed to any residentialconsumer.

What explains the sudden infatuation with broadband tax credits?One possible explanation is that no other broadband policy measureappears likely to move this session. Consensus has always been hardto come by when it comes to the contentious issue of telecomindustry regulatory policy. This has never been more true thantoday as a massive--and astonishingly confusing--advertising warbetween major industry players continues to play itself out onradio, TV, and in newspapers, on an almost daily basis. Meanwhile,on Capitol Hill, armies of lobbyists engage in an ongoing war asthey attempt to advance competing broadband policy bills. Thismelee has become the telecom industry's equivalent of a ColdWar-esque "mutual assured destruction" (or "MAD") policy, with itsseemingly endless escalation of spending on advertising andlobbying efforts to advance or halt the movement of regulatorylegislation. The result has been perpetual gridlock, but still thelobbying battle intensifies.

But while telecom's regulatory MAD war rages on, a temporarytruce has been declared on the tax incentive front since it appearsthat no party has anything to lose by supporting governmentintervention of this sort. Everyone seems to be at ease with theidea as long as they have a space reserved in line at the taxcredit trough. Few can find fault in a proposal that offers anyprovider a chance to receive an implicit subsidy for rolling outnew services to rural America. But there is a downside associatedwith broadband tax credits. Among the problems with the concept arethe following:

Tax credits do not address the fundamentalobstacle to more rapid broadband deployment--the highlyuncertain legal environment providers face today. The currentregulatory quagmire the American telecom sector finds itself in isconfusing mish-mash of complex operating standards; overlappingjurisdictional governance; asymmetrical regulatory policies; and,uneven tax treatment relative to other industries. Congress ispassing the buck on these difficult issues and hoping to appeasethe industry, the stock market, and the public in the short term byoffering broadband tax credits as a silver bullet solution toAmerica's broadband woes. This policy placebo will not work.

Tax credits are not likely to catalyze as muchdeployment as policymakers hope for. In the absence of thefundamental reforms discussed above, many providers are unlikely tosignificantly increase deployment efforts. While a 10 to 20 percenttax credit may help offset some of the capital costs associatedwith network expansion, many carriers will still be reluctant todeploy new services unless a simple and level legal playing fieldexists. For example, if outmoded regulatory quarantines (such asInter-LATA rules for the Baby Bells) or burdensome line-sharingrequirements (for the Bells or cable carriers) are applied tobroadband offerings, then it is unlikely those carries will want todeploy services even if tax credit incentives are available.

Tax credits are unnecessary in an environment ofproliferating choices. An upcoming Cato Institute study bytelecom consultant Wayne Leighton reveals that service options inthe broadband marketplace are growing rapidly and that Americansare gaining access to broadband services at a much faster rate thanprevious technologies. In an environment of proliferating consumerchoices, policymakers should exercise patience and allow thedeployment process to play out naturally.

Tax credits could be more advantageous to one set ofproviders or technologies than another. Does it reallymake sense to try to "wire America" once again when morecost-effective wireless technologies might prove superior overtime? This is not an argument for an industry policy favoringwireless providers and technologies, rather, it is warning aboutthe unintended consequences of providing tax credits at a time whenwireline providers and technologies are likely to be thepolitically favored technology in the short-term.

Tax credits could become an expensive and perpetualWashington entitlement program similar to previousindustry subsidy schemes such as the Rural Utilities Service (RUS).Spawned during the New Deal to electrify America (a taskaccomplished by the mid-1950s), the Rural ElectrificationAdministration (REA) lives on, albeit with a new name and mission.Today the RUS is already offering broadband loans to telecomproviders. The new broadband tax credit proposal will simply pileanother, and potentially more expensive, burden on the Americantaxpayer.

Tax credits will politicize a dynamic industryby allowing federal regulators to become more involved in howbroadband services are provided. By inviting the feds to act as amarket facilitator, the industry runs the risk of being subjectedto greater bureaucratic micromanagement since that which governmentsubsidizes it often ends up regulating too. Broadband tax creditsmight eventually lead to a wide array of concurrent regulatoryrequirements such as broadband "build-out" requirements ortimetables, which have already been proposed in conjunction withother broadband bills. It is not hard to imagine that suchtinkering with the daily affairs of industry might become morecommonplace if Washington starts subsidizing broadbanddeployment.

That explains why T.J. Rodgers, president and CEO of CypressSemiconductor, has cautioned the high-tech industry about"normalizing relations" with Washington, D.C. As Rodgers says, "Thepolitical scene in Washington is antithetical to the core valuesthat drive our success in the international marketplace and risksconverting entrepreneurs into statist businessmen." The high-techsector should think twice before entering into this pact withWashington. The allure of broadband tax credits may seem too goodto pass up, but as with any deal with the Devil, there'll be hellto pay once the honeymoon is over.