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No Net Taxes? Why Not?

By Howard Gleckman Throw together politicians, an election year, and the Next Big Thing, and the result is certain to be a boondoggle. In 2004, the NBT is broadband Internet access, and lawmakers are stumbling all over themselves in a digital pander-thon.

Over the past month, President Bush and likely Democratic challenger Senator John Kerry (D-Mass.) both vowed to do whatever it takes to make broadband universally accessible throughout the U.S. Bush even set a deadline of 2007. And on Apr. 29, the Senate moved to bar states from taxing Internet access, including broadband services, for the next four years. The House version of the measure would permanently bar states from taxing access.

Trouble is, nobody has been able to explain why these hot new technologies need government subsidies and tax breaks. They seem to be doing just fine, thank you, without new giveaways. By March, 2004, 41.5% of U.S. households with Internet access already had broadband, according to Nielsen/NetRatings. And the trend is growing by about 1% a month. Indeed, customers are signing up about as fast as providers can build the infrastructure to support them.

HEADED FOR A DITCH? So, what problem are lawmakers trying to solve here? Some supporters of a tax-free and government-subsidized Web claim that new taxes will keep families from signing up for fast Internet access. But is that really true? A 2003 University of Tennessee study found that households were about as likely to have Web access in states that taxed Internet-service-provider fees as in those that didn't.

Think about it. State and local sales taxes average about 6.5%. For low-cost dialup service, that adds about 65 cents to a user's monthly bill. For $40 broadband service, it might add $2.60.

That may chase away a few potential customers, but it seems unlikely that many will abandon what backers insist is an essential technology for the cost of a slice of pizza. Are consumers who happily spend $100 a month for cable TV, $40 for cell-phone service, and still more for their TiVo and their satellite radio subscriptions, really going to end up in the ditch beside the digital highway over another couple of bucks?

Besides, if consumers find a new state sales tax on their Net service onerous, they have a simple solution. Go to the polls and vote against the local officials who enacted the tax. It works every time. And they don't need Washington to make the rules.

THE MARKET WORKS. Such a broadband tea party isn't likely to occur. Providers themselves don't seem all that worried about price sensitivity. After all, most Baby Bells just raised their high-speed rates by $2 to $3 a month without batting an eye. They called it a regulatory fee, but it was nothing more than a garden-variety price hike.

If the crying over taxing Net access is over the top, the argument for tax relief or spending subsidies for broadband is even weaker. Today, digital subscriber line (DSL), cable, and satellite are slugging it out over who can offer the best high-speed service at the best price. That's exactly how it should be. People are signing up in droves, and competition is giving them a choice.

If the government begins to provide direct subsidies to providers or subsidized research and development for them, the country will be headed for the tortured realm of industrial policy. It won't take long before the competing services unleash their big-bucks lobbyists to make sure the subsidies favor their technologies. The Baby Bells will insist that DSL is the future, the cable guys will demand more R&D for their version of broadband. And the taxpayers will see their money slip down the drain.

ALMS FOR ASPEN. Broadband supporters like to say high-speed technology will add hundreds of billions of dollars to the U.S. economy. If that's true, let the providers build it out on their own dime. America has a $400 billion budget deficit. That means Washington must pay for any subsidies by raising somebody else's taxes or by borrowing still more money. In that environment, it's hard to justify giving away dough to Verizon (VZ) or Comcast (CMCSA) while taking it from the pocket of a guy working two jobs in Des Moines -- who's going to face either higher taxes or higher interest rates because of a profligate government.

The weakest argument of all, however, is the old digital-divide claim. You hear a lot about how the U.S. ought to subsidize broadband so it can be made available to rural users or the poor. Sounds good, but it doesn't work that way. The rural subsidy, which has already brought America the monthly universal-service fee on phone bills, turns out to provide cut-rate phone service to such needy communities as Aspen.

That's not to say the poor don't deserve a break. But it's hard to imagine that the Gucci crowd lobbying for the phone and cable companies really cares much about low-income users. Even if they do, the priorites seem to be warped here. At a time when government is slashing assistance for housing and health care, isn't it a little odd to be demanding subsidies for broadband access?

SUCCESS STORY. It sometimes sounds as if these folks believe it's O.K. if the poor live in a box under a bridge, as long as they have the latest in broadband technology.

High-speed Internet access is a marvelous economic success story. In a few years, it will be a near-universal means of communications in the U.S. And it's hard to imagine how imposing a modest sales tax on the service will slow that trend or why costly new government subsidies are needed to accelerate it. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views in Washington

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