The economic stimulus bill adopted by the Senate Finance Committee last week is nothing if not comprehensive. With the U.S. engaged in a critical fight against terrorism and facing a probable recession, the rescue plan adopted by the committee leaves no stone unturned in the search for solutions. Among its provisions: tax credits for electric vehicles, aid for Amtrak, extension of Andean trade preferences, and, in a no doubt significant blow to Osama Bin Laden, “citrus tree canker relief”.
Buried in this Thanksgiving pork feast is a provision of particular interest to the telecom and tech communities: tax credits for broadband telecom services. Here at least the bill’s drafters address a significant issue for the economy. But a digital industrial policy is the wrong answer. Instead of hand out subsidies, policymakers should address the regulatory and other barriers holding back broadband telecommunications.
The Senate’s bill would provide for two levels of tax subsidy for telecom providers, each with complex rules defining what is covered. A 10 percent tax credit is created for “current generation” broadband investments (for transmission speeds of 1 Mbps or higher). “Next generation” broadband services (above 22 Mbps) would receive a 20 percent credit. The first credit would be for service to customers in rural or “underserved” areas, except for residential subscribers in “saturated” markets. The larger credit would be for all rural and underserved area subscribers, as well as all residential subscribers.
What could be wrong with giving broadband a little subsidized boost? Well, a lot actually. Perhaps most worrisome, subsidies could distort the development of broadband in unknown ways.
The authors of the plan were careful to avoid the worst types of distortion: including wireless and satellite broadband technologies, as well as landline connections would be eligible for the credit. But distortion could still occur. For instance, economist Wayne Leighton argues that credits could perversely slow deployment in some rural areas. By accelerating deployment of existing technologies in rural areas closest to metro areas, Leighton argues that business plans based on new technologies that could serve the most remote areas could be undercut. As a result, the chances of providing broadband in these areas would be reduced.
This is only one of many possible distortions. Would providers build systems to meet the congressional definition of broadband, rather than the ones that make the most sense? Would rural credits deter investment in urban and suburban areas? Would investments in non-broadband telecom services be deterred? (Remember, despite the promise of broadband, consumer preference for high-speed service is still not clear).
There is an alternative to the Senate’s approach. Rather than artificially support broadband deployment, why not simply remove barriers to it? A key starting point would be the unbundling and other forced access rules on telcos that reduce incentives to invest in technology. (The stalled Tauzin-Dingell bill in the House would be a small step in that direction). Wireless technologies could be invigorated by freeing up more spectrum for private uses, and reducing limits on what those uses can be. General tax relief is also needed – including not just the outmoded 3 percent telecom excise tax, but reduction of capital gains taxes that deter all investment.
The Senate is right to identify broadband as potentially a key driver of economic growth. But rather than distort the digital marketplace through subsidies, policymakers would be much better advised to remove the barriers to its growth that government itself has erected. That is perhaps a more politically challenging task, but one that will leave telecom consumers, and the economy, much better off.
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