Thursday, February 28, 2008

Tech Tax Repeal

In my Random Acts of Taxation commentary published in the Baltimore Examiner on January 21, 2008, I explained why the enactment of the computer services tax was a mistake that will have a detrimental impact on Maryland and why it should be repealed. Several bills have now been introduced in both Houses of the Maryland General Assembly to repeal the tax adopted in the Assembly’s 2007 Special Session.

HB 187, 196, 253 and 326 and SB 41, 46, 138 and 567 would all repeal the tax. (Bill information is available at the General Assembly's website.) All of the House bills are scheduled for a hearing on March 12. None of the Senate bills have been scheduled for a hearing. Despite the fact that HB 196 has 72 sponsors and SB 138 has 17 sponsors, the repeal of the tax faces an uphill battle because of resistance from the President of the Senate.

All of the bills that would repeal the tax are identical except for the sponsors and all carry the same fiscal note reflecting a loss of revenue of $214 million. While the fiscal note reflects direct losses in State revenues from the repeal of the tax, it does not reflect the positive economic impact of attracting and retaining high tech businesses or businesses whose operations rely heavily on technology. The fiscal note does acknowledge that the repeal of the tax would have a “potentially meaningful” impact on small business.

In addition to the bills proposing outright repeal, several bills propose modifications to the application of the tax. Many of the proposed modifications reinforce the view that the computer services tax is ill-conceived, both in theory and in application.

For example, HB 1169 would exempt computer services that are used to provide Internet based publishing services if the publishing services are delivered exclusively or primarily outside the State. Several questions arise: what constitutes Internet publishing services and who is to determine whether they are delivered primarily outside the State? Are newspaper publications that have web sites considered Internet publishing services? Would the Comptroller’s Office need to count the readers within and outside the State to determine whether the publishing services are primarily delivered within the State?

HB 1183 would exempt services that enable users to access content or information over the Internet, such as access to the human genome database. If HB 1183 does not pass, would taxes be imposed on each visit to any web site that provides content or information? If so, what collection mechanism would be employed for all the free web sites now available?

HB 1169 and 1183 are just two examples of the problems created from the hasty adoption of the computer services tax. The administrative burden for the State to collect and the taxpayers to pay will almost surely exceed the revenues to be generated.

HB 281 would exempt computer services used in fulfilling federal contracts and SB 257 would exempt services for fulfilling both State and federal contracts. Since neither the federal government nor the State are generally subject to State taxes, this raises a question about whether the fiscal note estimate of revenue loss includes loss of taxes on services provided to the federal and State governments.

The computer services tax was a bad idea, hastily adopted. It should just as hastily be repealed.

While Maryland legislators fiddle, state officials from Delaware, Pennsylvania and North Carolina are luring Maryland based information technology businesses. It is time to stop fiddling and repeal the tax.

Sunday, February 24, 2008

You Don't Need a Harvard Education

When I was a kid, my mother was wont to say, “you don’t need a Harvard education,” to understand thus and so. She didn’t necessarily mean it as an insult to other educational institutions, but she did mean to say that some things ought not to require a college degree to appreciate.

The FCC commissioners are at Harvard Law School today for a hearing on “broadband network management practices.” The hearing takes place as the agency is receiving comments in response to two petitions. One asks the Commission to declare that Comcast’s and other broadband providers’ handling of peer-to-peer traffic violates the FCC’s Internet Policy Statement. The other asks it to initiate a rulemaking to define in advance what constitute “reasonable network management” for broadband network operators.

The Free Press and its net neutrality advocate allies will use the hearing to try to turn up the heat on the FCC to force net neutrality mandates – that is, old-fashioned public utility regulation — on the broadband providers. Even a cursory review of the Free Press comments filed in the Commission’s broadband industry practices proceeding makes clear that they want an absolute, no-exceptions policy prohibiting any so-called “discriminatory” treatment of Internet bytes, regardless of whether such treatment is necessary and proper in the interest of reasonable network management, much less in the interest of overall efficiency and cost-effectiveness.

You don’t need a Harvard education to see that the net neutrality advocates are trying to draw the FCC into adopting broad net neutrality regulation through the back door, even as they continue their frontal assault. In the Free State Foundation comments filed with the FCC on February 12, I said it is imperative for the Commission “to articulate and demonstrate its understanding that network managers must be given wide berth to manage their networks in the general interest of all their consumers, not smaller segments with narrower interests.” I explained it would be foolhardy, in today’s dynamic and fast-changing technological and marketplace environment, for the FCC to attempt to define in advance what constitutes “reasonable network management.” And I said the Commission’s explicit policy should be, “absent clear and convincing evidence demonstrating substantial consumer harm, it will not act in a way that interferes with broadband providers’ management of their networks.”

You don’t need a Harvard education to know the FCC is ill-suited to play the role of uber-network manager. With all the challenges presented by the explosive growth of Internet usage, especially the explosion in peer-to-peer traffic, and by the persistence of ever-changing forms of malicious traffic, even highly paid, highly-qualified full-time network engineers have a tough time managing broadband networks in a way that provides a satisfactory Internet experience to all their subscribers.

Finally, as my mother would have reminded, you don’t need a Harvard education to know that if you get on a slippery slope, you are likely to find yourself sliding down to a bad place. The FCC should be very careful to avoid being lured onto the slippery slope of a full-blown net neutrality regime under the guise of dictating what constitutes reasonable network management.

Tuesday, February 05, 2008

Universal Service Reform in '08

Now that the FCC has issued its three notices of proposed rulemakings regarding potential reform of the bloated and insufficiently-targeted Universal Service funds, it is appropriate to point out once again that the agency should make USF reform a top priority this year. The truth is that, now that we have a competitive marketplace with multiple choices of communications services using different technological platforms, the universal service regime needs a pretty radical overhaul. This would mean changing the program so that USF funds are directed mostly to support to consumers who demonstrate they need financial support, rather than, as now, mostly to communications providers who may use the support in ways that do not necessarily benefit underserved consumers, or serve them in the most cost-effective, efficient ways.

Be that as it may, radical USF change is not likely a near-term prospect. This makes it even more important for the FCC to seize the opportunity this year to make some meaningful, even if modest, progress towards reforming the regime. FCC Commissioner Deborah Taylor Tate and Oregon Public Utility Commissioner Ray Baum deserve credit for their patient leadership of the Federal-State Universal Service Joint Board. The panel made some worthwhile recommendations to the Commission.

In line with the Joint Board recommendations, the FCC should cap the size of the high-cost universal service fund at $4.5 billion; stop wireless carriers from receiving subsidies based on the “identical support” received by the incumbent wireline carriers, even though the wireless companies generally have lower costs; and adopt some form of “reverse auctions” as a method of determining which communications providers can serve designated high-cost areas on the least costly basis.

A few of the Joint Board’s statements in its November 2007 Recommended Decision are especially noteworthy. Regarding the overall size of the high-cost subsidies, now at approximately $4.5 billion per year and growing, the Board said this:

"Many areas of government enterprise operate within a budget, and we think that high-cost funding can do likewise, provided that we are willing to make realistic estimates of the funding needed to meet the statutory requirement that we preserve and advance universal service. Over the longer term, we anticipate that total funding can and should be decreased as broadband and wireless infrastructure deployment becomes widespread throughout the country."

Without delay, the Commission should adopt the proposed cap on the size of the high-cost fund. This would stem the growth of the USF tax paid by all consumers, which currently stands over 10%, in contrast to 6.8% in the first quarter of 2002.

The Commission should move with more than its usual dispatch to adopt the Joint Board’s recommendation to eliminate the identical support rule which provides support to wireless carriers without regard to costs. Regarding the wastefulness inherent in this element of the current regime, the Board stated:

"The Joint Board recognizes that the identical support rule has resulted in the subsidization of multiple voice networks in numerous areas and greatly increased the size of the high-cost fund. High cost support has been rapidly increasing in recent years due to increased support provided to competitive ETCs. These carriers receive high-cost support based on the per-line support that the incumbent LECs receive rather than the competitive ETCs’ own costs. Support for competitive ETCs has risen to almost $1 billion. We believe it is no longer in the public interest to use federal universal service support to subsidize competition and build duplicate networks in high-cost areas…The rule bears little or no relationship to the amount of money competitive ETCs have invested in rural and other high-cost areas of the country."

From 2001 through 2007 the financial support to the competitive wireless carriers increased from $17 million to $1 billion, and much of this subsidy has not gone for build-outs to unserved areas.

And, finally, the Commission should adopt some form of reverse auctions, even if initially on some less-than-universal experimental basis. Reverse auctions would provide a means of determining which provider (or providers) should be awarded subsidies to serve designated high-cost areas. The auction mechanism would encourage the provision of service on the most cost-effective, efficient basis, and spur the development of more innovative new network technologies.

Realistically, designing and implementing an appropriate auction mechanism may well take most of the year. But there is no reason why the FCC cannot adopt a high-cost fund cap right away. FCC Chairman Kevin Martin has endorsed the idea, and, with Commissioner Tate, has shown leadership on USF issues. And, it ought not to take that many months, after all the discussion over the past couple of years and the work already done on the issue by the Joint Board, for the agency to adopt the change in the identical support rule.

More comprehensive and fundamental reform of our nation’s communications laws and policies consistent with the new marketplace realities arguably may require several more years of congressional gestation and new presidential leadership. But, in the meantime, the FCC should set its sights on achieving meaningful progress this year in the cause of universal service reform.