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Will the FCC’s net neutrality decision cost Americans $15 billion in new taxes? Nope

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“Another reason this is so damaging to the private sector is the taxes that it is going to put on your broadband providers — an estimate of $15 billion in new taxes that would come in through a Title 2 regulation.”

Rep. Marsha Blackburn (R-Tenn.), Fox Business interview, Jan. 5, 2015

“Under this decision to reclassify broadband, Americans would face a host of new state and local taxes and fees that apply to public utilities. These new levies, according to the Progressive Policy Institute (PPI), would total $15 billion annually.”

Grover Norquist and Patrick Gleason from Americans for Tax Reform, article, Jan. 6, 2015 

There’s a lot of buzz over “net neutrality,” and it is bound to heat up more in the next month. The debate over net neutrality is highly technical and complex, and much of the disagreement is over sausage-making technicalities of utility regulation. But these two claims stand out because they refer to something that’s easy to comprehend: How much it will cost the consumer?

At question is whether the Federal Communications Commission will change the way it regulates the Internet by “reclassifying” broadband providers as a public utility, like water, telephone or electricity. The FCC is expected to announce its decision by the end of February.

Opponents of the change argue it would cost Americans $15 billion a year, and consumers will see a significant spike in taxes and fees. Is that really the case?

The Facts

The FCC is weighing whether to reclassify broadband Internet access as a “common carrier” under Title II of the Telecommunications Act. This change would ensure “net neutrality,” proponents say, because it would give equal access to the Internet. It would prohibit Internet service providers, such as Comcast, from making agreements with Web sites, such as Netflix, to provide faster and more reliable connection for subscribers to stream movies and TV shows.

Opponents argue the “light-touch” regulatory approach has worked fine and the reclassification would hurt innovation. They say it would add billions of dollars in fees and taxes for American consumers. (For more on the debate, our colleague Brian Fung has a great primer that explains it in plain English.)

Blackburn and Norquist, who are conservatives, said they got the $15 billion figure from a December 2014 report by economists at the left-leaning Progressive Policy Institute. PPI calculated a host of state and local taxes and fees that could be assessed on broadband Internet service if it were treated as a traditional telephone service.

Researchers used current taxes and fees levied on telephone services and applied them to Internet services under the new FCC classification. They found new fees and taxes could reach $15 billion a year. (The report also calculates a separate set of federal Universal Service Fund fees totaling an extra $2 billion a year, but the FCC has not decided whether to extend these fees in case of reclassification.)

But after the report was published, Congress renewed the Internet Tax Freedom Act (ITFA), which prohibits state and local governments from levying new taxes on Internet access. So researchers published an article modifying the figure to $11 billion — a 27 percent decrease. The $11 billion figure was included in a footnote of the article, so it is not immediately clear that the original calculation was modified.

The authors noted their original analysis “did not consider state law limitations on the application of taxes and fees to jurisdictionally mixed services that are classified as interstate for regulatory purposes.” This is important because the FCC could designate broadband as an interstate service, rather than a service that can be contained within state geographical boundaries. If that happens, the intrastate state and local fees in the analysis would not apply.

The breakdown of charges calculated is not available publicly, but co-author Hal Singer shared some examples with The Fact Checker. In California, for example, the charges included a universal lifeline telecom service surcharge, state 911 surcharge, local 911 surcharge and a public utility commission fee, among others.

Some experts say it’s a stretch, if not flatly inaccurate, to consider 911 fees in the calculation. State or local 911 fees tend to be intrastate and are designed to recover a specific amount needed to run 911 call centers. The demand for 911 service is not contingent on the federal classification for Internet service changes. When we raised this to Singer, he said 911 fees are a modest portion of the state and local fees and would not decrease the $11 billion figure significantly.

“The point of the study is that reclassification puts 911 fees — and all of these other telecom-related fees — on the radar,” Singer said, and tax administrators could try to charge all of them. He also noted that some state and local governments are levying taxes and regulatory fees on wireless phone services (called Voice over Internet Protocol, or VoIP — an example of this is Vonage), regardless of the interstate designation.

A main critic of the study is Free Press, an organization that advocates for open Internet. Free Press and other open-Internet advocates say consumers will not see “even a penny more” on their bills as a result of reclassification. (There is a lot of back-and-forth on this, for those who want to dive into the wonkery.)

The reality may be somewhere in between. Tax and regulation experts interviewed by The Fact Checker had varying views on how much the FCC reclassification would cost consumers, and whether all consumers would see an increase in their bills. But they agreed it likely will cost some consumers something, depending on the final FCC definition and how individual state and local taxing jurisdictions react.

States have challenged some tax exemptions under ITFA in court, especially as landline revenues decline. If the FCC decides to reclassify, there likely will be more litigation to challenge what states or local governments can charge, experts said. “That leaves room for states to be more or less aggressive, depending on their politics toward taxpayers and what fiscal crises they may be facing,” said Michael Dillon, tax attorney and expert on ITFA.

The Fact Checker asked aides of Blackburn and Norquist why they used the $15 billion number after it was modified, and given the caveats. Blackburn’s spokesperson did not respond. John Kartch, from Americans for Tax Reform, said: “The piece referenced the PPI study, so we are dependent on what PPI would say on the difference between the numbers. The point of the op-ed is equally valid whether the number is $15 billion or $11 billion — taxpayers are getting the shaft either way.”

The Pinocchio Test

It is impossible to quantify the exact impact of the potential FCC decision, since Internet regulation is a new area of policy. New taxes are prohibited as long as the Internet Tax Freedom Act is in effect, so it is inaccurate to say there would be $15 billion in new taxes. There may be state charges and fees, but there is no proof that all of the current fees on telephone services would apply again to Internet services. It will not add up to $15 billion, and likely not add up to $11 billion — the worst-case scenario. The researchers agree it is a “high-end” estimate, which was the purpose of the report.

There are too many unknowns to alarm consumers who are not well-versed in the technical and legal details of telecommunications regulations and laws. Given the uncertainties, it would be more appropriate to give a range of potential charges. But the researchers did not calculate a low-end figure for the report. In addition, the modification from $15 billion to $11 billion is a 27 percent decrease, yet the change is buried in a footnote and not readily visible for the public.

The more complex the issue, the easier it is for politicians to obfuscate the reality with dramatic numbers. On behalf of the average American consumer, we award Three Pinocchios to the use of the $15 billion figure.

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