FCC eyes tax on Internet service
By Brendan Sasso - 08/26/12 06:00 AM ET
The Federal Communications Commission is eyeing a proposal to tax broadband Internet service.
The move would funnel money to the Connect America Fund, a subsidy the agency created last year to expand Internet access.
The FCC issued a request for comments on the proposal in April. Dozens of companies and trade associations have weighed in, but the issue has largely flown under the public's radar.
"If members of Congress understood that the FCC is contemplating a broadband tax, they'd sit up and take notice," said Derek Turner, research director for Free Press, a consumer advocacy group that opposes the tax.
Numerous companies, including AT&T, Sprint and even Google have expressed support for the idea.
Consumers already pay a fee on their landline and cellular phone bills to support the FCC's Universal Service Fund. The fund was created to ensure that everyone in the country has access to telephone service, even if they live in remote areas.
Last year, the FCC overhauled a $4.5 billion portion of the Universal Service Fund and converted it into a broadband Internet subsidy, called the Connect America Fund. The new fund aims to subsidize the construction of high-speed Internet networks to the estimated 19 million Americans who currently lack access.
Julius Genachowski, the FCC's chairman, has made expanding broadband access his top priority. He argues that a high-speed Internet connection is critical for succeeding in the 21st century economy and that expanding Internet access is the country's next great infrastructure challenge.
But the money for the new Internet subsidy is still coming from the fees on phone bills.
And in recent years, with more people sending emails instead of making long-distance phone calls, the money flowing into the program has begun to dry up. The Universal Service fee has had to grow to a larger and larger portion of phone bills to compensate.
The FCC floated a number of ideas for reforming the fund's contribution system. In addition to the broadband fee, the commission also sought comments on taxing text messages, as well as levying a flat fee on each phone line, instead of the current system, which is based on a portion of the revenue from interstate phone calls.
The commission only sought input on the ideas and did not indicate whether it planned to move ahead with any of them, including the broadband fee.
When the FCC released its proposal, Genachowski issued a statement saying the current contribution system is outdated and full of loopholes.
"Today we propose three goals for contribution reform: efficiency, fairness, and sustainability," Genachowski said. "And we underscore that any reforms to the contribution system must safeguard core Commission objectives, including the promotion of broadband innovation, investment, and adoption."
In its filing, Google argued that the evidence "strongly supports expanding the [Universal Service Fund] contribution base to include broadband Internet access services."
According to Google, taxing broadband service is preferable to taxing the kinds of online services it offers, like email or Google Voice.
"Saddling these offerings with new, direct USF contribution obligations is likely to restrict innovative options for all communications consumers and cause immediate and lasting harm to the users, pioneers, and innovators of Internet-based services," Google argued.
But Turner argued that imposing a fee on broadband access, even if it is only a dollar or two, would discourage many people from buying the service—the exact opposite outcome of what the FCC is trying to achieve.
"For folks who are thinking about adopting broadband, who have much lower incomes or don't value broadband as much—that extra dollar on the margins will cause millions of people... to not adopt," Turner said.
The FCC could run into legal problems with the Internet Tax Freedom Act, a 1998 law that bans the government from taxing Internet access. But the FCC has long argued that Universal Service is a fee that the providers choose to pass on to consumers and not a tax.
Turner said it is unlikely that the FCC will make any controversial moves before November's election.
"I don't anticipate that the chairman would move to adopt a drastic overhaul ahead of the election," he said.