Policy Documents

Research & Commentary: Internet Access Taxes

December 17, 2012

The Internet Tax Freedom Act of 1998 was designed to promote the growth of the Internet by placing a moratorium on state and local taxation of Internet access and the creation of discriminatory taxes on emails and other data. The moratorium is set to expire in 2014.

Despite the moratorium, Internet users in some states still pay access taxes on their Internet service provider (ISP) bills. When the Internet Tax Freedom Act was passed, ten states were grandfathered in and were allowed to tax ISP charges as part of a political compromise. These ten states are Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Tennessee, Texas, Washington, and Wisconsin.

There has been some confusion about which taxes the moratorium applies to. The only taxes prohibited by the moratorium are fees for Internet access, such as broadband or dial-up services; the moratorium does not exempt Internet sales from general state sales taxes. Critics of increased Internet access taxes argue that allowing these taxes could quickly make ISP bills resemble phone bills, with more and more taxes added and more people being unable to afford Internet access.

The threat of new Internet access fees has come from the Federal Communications Commission and the Connect America Fund. In 2011, the FCC created the CAF by taking $4.5 billion from the Universal Service Fund (USF) designed to provide advanced telecommunications services. Recently the FCC has proposed expanding the CAF by creating a new fee to be tacked onto the bills of all broadband Internet connections nationwide, even though nearly the entire nation (around 95 percent) already has access to broadband.

Internet access taxes would hit broadband users everywhere for billions of dollars of new government spending, placing an unnecessary burden on consumers in order to do something the market is already handling quite effectively. Extending the Internet access moratorium or, better yet, making it permanent would help broadband access and development expand while reducing the need for more government broadband spending.

The following documents discuss Internet access taxes and the proposed Connect America Fund from multiple perspectives.

Ten Principles of Telecom Policy
http://heartland.org/policy-documents/ten-principles-telecom-policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reforms in Indiana, document the advances made by other innovation leaders in the telecom market, and explain how other states can follow their lead to reap the rewards of new investment in telecommunications services.

Taxes and Fees on Communication Services
http://heartland.org/policy-documents/no-113-taxes-and-fees-communication-services
In this Policy Study from The Heartland Institute, David Tuerck, Paul Bachman, Steven Titch, and John Rutledge document taxes and fees on communication services, describe their destructive consequences, and call for tax and regulatory reform.

The Case for Tax-Free Internet Access
http://heartland.org/policy-documents/case-tax-free-internet-access
Daniel Castro of the Information Technology and Innovation Foundation discusses the advantages of tax-free Internet access and argues for keeping the moratorium on Internet access taxes. “State tax policy should reflect the fact that Internet access is not merely a consumer good, but rather a tool used by producers to increase economic efficiency and lower the cost of production,” he writes.

The Case for Tax-Free Internet Access: A Primer on the Internet Tax Freedom Act
http://heartland.org/policy-documents/case-tax-free-internet-access-primer-internet-tax-freedom-act
Daniel Castro of the Information Technology and Innovation Foundation explains why Congress should make the current moratorium on Internet access taxes permanent and eliminate the grandfather clause that allows some states to tax Internet access at the expense of the nation as a whole. The report also discusses the legislative history of the Internet Tax Freedom Act and the national benefits of tax-free Internet access. Finally, the report reviews and refutes the objections of opponents of the moratorium.

The Economic Impact of Taxing Internet Access
http://www.heritage.org/research/reports/2004/02/the-economic-impact-of-taxing-internet-access
Heritage Foundation researchers Norbert J. Michel and William W. Beach present an economic analysis predicting that taxing Internet access would reduce GDP, disposable income, and employment.

Internet Tax Debate: Freedom vs. Taxation
http://www.atr.org/internet-tax-debate-freedom-vs-taxation-a1933
Americans for Tax Reform argues keeping the Internet tax-free represents freedom and that taxes on Internet access would become onerous if allowed.

A Scare for the Web: Will Congress Let the Internet Tax Ban Expire?
http://heartland.org/policy-documents/scare-web-will-congress-let-internet-tax-ban-expire
James L. Gattuso of The Heritage Foundation explains why the federal ban on Internet access taxes should be made permanent.

Internet Access Tax Moratorium: Revenue Impacts Will Vary by State
http://heartland.org/policy-documents/internet-access-tax-moratorium-revenue-impacts-will-vary-state
The Government Accountability Office examines the Internet access tax moratorium, reviewing its language, legislative history, and associated legal issues; examines studies of revenue impact; discusses interviews with experts in access services; and presents information about eight case-study states not intended to be representative of other states.

Bandwidth for the People
http://heartland.org/policy-documents/bandwidth-people
Robert Crandall, Robert Hahn, Robert Litan, and Scott Wallsten discuss broadband policies and their possible effects in this AEI-Brookings Joint Center for Regulatory Studies paper. The authors argue Internet access taxes are likely to be inefficient and costly to the economy relative to certain other taxes. They will also impede broadband rollout. Given the positive effects of competition, the authors highlight the importance of removing obstacles to investment and competition. Thus, although averting new access taxes is important, it is probably a second-order concern compared with removing regulatory barriers to competition, the authors conclude.

Never a Right Time to Tax Internet
http://www.cato.org/publications/commentary/never-right-time-tax-internet
Stephen Moore of the Cato Institute argues against Internet access taxes and for the moratorium. Implementation of an Internet access fee would do real damage to the tech sector, he writes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at http://news.heartland.org/tech, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.