Net Neutrality — FCC Regulation Could Cost Consumers $6 Billion

As the Federal Communications Commission prepares to vote Feb. 26 on a proposal to regulate the Internet as a public utility under Title II, all eyes are on the costs of so-called net neutrality — the idea of an open Internet where companies treat all traffic on their broadband networks equally.

The proposal by the FCC’s chairman, Tom Wheeler, has been heavily touted and roundly rebuked. Supporters say the plan would prevent cable and telecommunications monoliths from creating paid Internet fast lanes that would hurt competition. Opponents say the proposal would subject Internet users to high taxes, comparable with those on phone services.

Using data on current telecommunications taxes, economists Hal Singer and Robert Litan estimated the potential tax burden to broadband consumers should the FCC approve the proposal. Combining their estimates with U.S. Census Bureau figures on the number of Internet connected households in each state, NerdWallet set out to determine the states where consumers would see the highest overall tax increase.

Here’s what we found:

• Reclassifying wired broadband Internet from an information service to a telecommunications service under Title II of the Telecommunications Act could mean Americans will pay $6.25 billion in new taxes each year.
• On average, U.S. consumers could pay $67 more a year in taxes for their Internet service.
• California and New York residents would see the highest increase in taxes because of the large populations in those states, which are already home to some of the nation’s highest telecommunications tax rates.
• Pennsylvania residents would have to pay the highest increase in taxes per household — an estimated $131 a year.
• At an estimated $8 tax, Delaware’s residents would see the lowest projected increase. Wyoming, Montana, Maine and North Dakota rounded out the bottom five.

Take a look at the chart below to see projections of how much each state’s residents could pay in aggregate Internet tax:

* States where price data was available for one city only.

While experts agree Title II reclassification will raise broadband costs, it remains unclear what the exact tax implications will be if the FCC acts on the plan. Singer, in a phone interview, said the potential for taxation stems from the language of Title II, which would subject the Internet to “any fees that relate to the obligation of being a telecommunication provider,” which implicitly states broadband can be taxed at the same rate of current telecommunications services.

However, these taxes will be assessed separately at the federal, state and local level, so where you live makes a big difference in how much you’ll pay. Since many taxes are percentage based, consumers in cities where Internet services are already the most expensive in each state will likely see the biggest increase in taxes.

Further, a state’s ability to tax doesn’t guarantee that it will. However, Vermont, which hinted that it plans to apply a 2% Universal Service tax to broadband, could be an indication of what is to come. Pressure to tax Internet services is likely to increase as the use of landlines — and the tax revenue they generate — declines.

Methodology 

Aggregate tax: This estimate for residents in each state was calculated by averaging the high and low values calculated by Singer and Litan, and applying those figures to 2013 U.S. Census Bureau data for households with non-dial up Internet.

Telecommunication fees: The data on current taxes paid by residents in each state were provided to Singer and Litan by Vertex and CCH. However, Singer and Litan have revised their figures since then, and now sales tax isn’t included. State-by-state breakdowns of the new numbers weren’t available.

Notes

Vermont and Idaho aren’t included on the table because price data wasn’t available.

Current Internet costs for the most expensive city in each state are from the Ookla Net Index. Wireless costs weren’t calculated for this study.

Image via iStock.