Monday, November 23, 2015

Maryland Needs to Improve Its Business Tax Climate Ranking

On November 17, 2015, the nonpartisan Tax Foundation released its 2016 State Business Tax Climate Index co-authored by Jared Walczak, Scott Drenkard, and Joseph Henchman. Unfortunately, in this annual ranking, Maryland has not improved since the 2015 index was released. Indeed, it actually fell one place to No. 41. This slippage drops the state into the Tax Foundation’s “10 Worst Business Tax Climates” grouping.

As I have written several times earlier this year, Maryland Governor Larry Hogan, since taking office, has taken some concrete steps to improve the state’s business climate reputation – and, thus, Maryland’s competitive position among the states. But the governor needs more cooperation from Maryland’s General Assembly to effect the changes that would improve Maryland’s overall business climate, including its tax climate.

In developing its state rankings, the Tax Foundation examines the following five factors (with Maryland’s rank indicated): Corporate Tax (19); Individual Income Tax (45); Sales Tax (8); Unemployment Insurance Tax (28); and Property Tax (42). Sadly, Maryland’s rank did not improve in any category from 2015 to 2016. As stated, its overall ranking fell from 40 to 41.

I do not claim that rankings such as this are perfect. I do not even claim that this particular study necessarily tells the complete story about Maryland’s “business tax climate.” But the Tax Foundation’s study surely is useful as an indication that changes are needed if Maryland is to improve its business tax climate. As the study states: “While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement.” And with respect to the ten worst states in the ranking, the Tax Foundation says this of special relevance: “The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates.”

Of course, the rankings are not just for sport; they reflect real-world factors that influence businesses decisions that, in turn, impact jobs, investment, and a state’s overall economic prosperity. As the Tax Foundation recalled in this year’s study: “In 2010, Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate.” And as you can see from the map below, none of Maryland’s neighboring states rank in the “10 Worst Business Tax Climates.” Delaware, West Virginia, and Virginia, for example, rank significantly higher.

Aside from the Tax Foundation’s just-released business tax climate index ranking discussed here, Maryland recently has been ranked 37th in overall fiscal health; 39th in small business climate; and 45th in individual income tax structure in various studies. Again, it is not necessary to claim infallibility for each of the various studies from which the rankings were derived in order to maintain that there is much room for improvement with respect to Maryland’s business climate and its overall fiscal health.

In the past several months, with the research assistance of my Free State Foundation colleague Michael Horney, I have published a series of blogs addressing various aspects of Maryland’s regulatory and business climate and its budgetary and fiscal situation. For convenience sake, here they are:

Of course, Maryland’s national ranking in other important measures, such as education and household income, are higher. And its current unemployment ranking at 5.1% is right in the middle. So, the overall picture is by no means bleak.

But Governor Hogan is right to focus on improving Maryland’s business climate and its overall fiscal health. His actions this year to eliminate or reduce over 100 fees across state government, amounting to an estimated savings of approximately $51 million over five years, and to establish a commission to recommend elimination of unnecessary regulations are tangible steps in the right direction. Governor Hogan should continue on this course, and the legislature should support the change in direction towards a lower tax, more restrained spending, less regulatory environment that Maryland needs.

Friday, November 20, 2015

New Paper: New Technologies are Upending the Typical Role of Regulation

On November 19, 2015, Will Rinehart, Director of Technology and Innovation Policy at American Action Forum, released a paper entitled "The Modern Online Gig Economy, Consumer Benefit, and the Importance of Regulatory Humility.” In the paper, Mr. Rinehart discusses the many consumer benefits of sharing economy platforms. He also says that reputational feedback mechanisms create transparency and enable trust between consumers, upending the typical role of regulation. This is an important paper for understanding why competition and self-regulating markets can often create more efficient outcomes for consumers than government regulation.

Wednesday, November 18, 2015

New Study Shows States Should Lower Wireless Tax Rates

On November 16, 2015, the Tax Foundation released a new study authored by Scott Mackey and Joseph Henchman showing that consumers are experiencing record high wireless taxes and fees in 2015. Federal, state, and local taxes and fees combined constitute nearly 18 percent of the average U.S. wireless customer’s monthly bill. And while the price of the average wireless bill has been decreasing over the past seven years, the nationwide average tax rate has been climbing quickly.
Among the individual states, Maryland has the 14th highest wireless tax rate and is significantly above the national average. Although Maryland’s ranking went down slightly from 2014, when it was 13th among states, nevertheless its combined state and local wireless tax rate went up from 12.37 percent to 12.67 percent. This increase likely will cost Maryland wireless consumers hundreds of thousands of dollars a year on top of the unreasonably high tax burden they already incur.
As I stated in an April 2015 blog, wireless taxes disproportionately impact poor families who rely on wireless devices as their main form of communication and Internet access. Roughly 56 percent of all poor American adults use wireless Internet service as their only connection, therefore high tax rates impose disproportionately burdensome costs on low-income consumers. Taxes on communications and Internet access should be kept as low as possible to push prices to an affordable level so every consumer can get online.
Florida led by example earlier this year and reduced its wireless tax rate. It is time for Maryland and other states, especially but not limited to those above the national average, to reduce taxes to alleviate this burden on wireless consumers.

Friday, November 13, 2015

Remove Barriers, Reallocate Spectrum, and Benefit Consumers and the Economy

In his testimony during the October 28 hearing on “Breaking Down Barriers to Broadband Infrastructure Deployment,” before the House of Representatives’ Energy and Commerce Committee, Scott Bergmann, VP of Regulatory Affairs at CTIA – The Wireless Association, stated that “sound infrastructure policy is a necessary complement to good spectrum policy.” Since 1996, U.S. Internet Service Providers (ISPs) have invested $1.4 trillion in broadband infrastructure. With each passing year, ISPs will likely invest more and more, but there are barriers that constrain private investment. Of course, costly Internet regulations create investment barriers. But other rules at the federal, state, and local levels regarding approval and construction stifle broadband investment as well.
There are six pieces of draft legislation proposed in the House which would lower deployment costs and streamline some of the approval processes, including a “dig once” policy. But as Mr. Bergmann said at the hearing, infrastructure policy and spectrum policy are complements. Therefore, Congress must get it right on both ends for consumers to experience next-generation mobile broadband for years to come.
In 2012, the Congressional Budget Office (CBO) released a report regarding legislation that authorized the FCC to auction spectrum. The CBO estimated that the AWS-3 auction would either not happen or would not bring in any revenue. This turns out to be massively underestimated considering that the AWS-3 auction generated roughly $41 billion and the TV broadcasting auction scheduled for March 2016 is likely to generate another $30 to $40 billion. Currently, a new bill exists, the Federal Incentive Spectrum Act (FISA), which would allow federal agencies that relinquish spectrum to keep 1 percent of the proceeds from the sale. Hopefully, the CBO’s inaccurate 2012 report does not have a lasting effect on members of Congress as FISA moves forward, because reallocating spectrum is absolutely crucial for the economy.
Both spectrum policy and broadband infrastructure policy should be bipartisan issues. The current amount of spectrum allocated for private use will not be enough to keep up with mobile data traffic, which is projected to increase seven-fold from 2015-2019. Additionally, wireless broadband needs wireline infrastructure and many cell towers to deliver quality service. Therefore, Congress should focus on two policies in this space: 1) removing costly barriers so providers can install next-generation technologies throughout the country and 2) reallocating licensed spectrum for private use. Given the positive effect that mobile broadband has had on the economy as a whole and the benefits it brings to American consumers, both of these policies should receive bipartisan support from Congress.
As for the valuation of spectrum auctions, the CBO report was inaccurate. Not only did the CBO claim that the AWS-3 auction would not bring in any revenue, it also failed to realize that allocating more spectrum for commercial use would increase economic activity and create jobs. In a May 2015 Brattle Group and CTIA report entitled “Mobile Broadband Spectrum: A Vital Resource for the American Economy,” authors Coleman Bazelon and Giulia McHenry estimated that licensed spectrum has created $400 billion in economic activity, not including the value of mobile applications. Mr. Bazelon and Ms. McHenry also estimated that for every person employed in the wireless industry an additional 6.5 people will be employed in other sectors. (See my May 2015 blog for more on this.)
When economic activity and jobs are created, the tax base expands, thus creating more opportunities for the government to generate revenue. Therefore, in the long run, reallocating spectrum for private use is a win-win – a win for the economy and a win for taxpayers, because (all else equal) expanding the tax base marginally reduces the tax burden on each individual.
Mobile broadband is transforming day-to-day life in areas like medicine, education, and even policy decisions. For example, telemedicine allows patients to be monitored remotely and can send signals to doctors about possible health threats. Patients who require monitoring will need a mobile connection so doctors can monitor their status at any given time. The rapid growth of mobile data traffic increases the potential for network congestion. Patients who use telemedicine cannot afford to experience congestion or latency. Reallocating spectrum for private use and removing deployment barriers would increase the capacity of mobile networks, mitigate congestion, and potentially save lives.
Mobile technology has already changed the way teachers and students communicate, but with more spectrum and deployment, students will be able to utilize their time more efficiently. The 2010 National Broadband Plan set the goal of connecting all schools with high-speed Internet access, but the FCC has failed to accomplish the spectrum goals, a prerequisite for schools having access to 21st century technology. According to the National Broadband Plan, the FCC should have reallocated 300 MHz of spectrum by 2015, but currently has only reallocated 149 MHz.
Additionally, it can take many years to get permission to build broadband infrastructure on federal property, which is often the only or best way to reach many rural schools. As state and local governments are attempting to fully equip schools with 21st century technology, education curriculum is moving online and digital literacy is becoming a necessary skill. More spectrum and broadband deployment would allow professors to provide students with course work while traveling, teachers to enhance the learning experience of school field trips, and students to research in off-campus settings.
Importantly to members of Congress, constituents are using mobile broadband to engage themselves and others in the political process. Social media platforms, like Facebook and Twitter, are allowing people of all ages and demographics to have a greater voice in shaping policy.
The expansion of mobile broadband has positively impacted the economy, medicine, education, policymaking, and many other realms of American life. It is certainly time for Congress to act to remove barriers to further infrastructure deployment that, if not addressed, are likely to negatively impact the consumer experience in future years.

Thursday, November 12, 2015

The Spectrum Pipeline for 5G Needs to Be Accelerated

By Gregory J. Vogt, Visiting Fellow

Another American “pipeline” needing government approvals is rarely in the press, unlike the Keystone pipeline, which we’ve heard a lot about. This other “pipeline” is designed to identify, evaluate, and reallocate spectrum for future mobile broadband use. With recent FCC actions concerning above-24 GHz spectrum, and Congress’ proposed Spectrum Pipeline Act, government appears to be recognizing that the spectrum pipeline needs to be constructed. This is good but the efforts are timid and woefully slow to meet projected demand.

Although the wireless industry has just deployed so-called 4th Generation (4G), or Long Term Evolution (LTE), technology, it is not too soon to actively pursue making available the spectrum the next generation (5G) will need beginning around 2020.

It is now well known that wireless communications produces enormous consumer welfare benefits, including increases in GDP, investment, and jobs. It also produces significant secondary positive impacts in markets and applications that rely on mobile to improve productivity.

But history has shown that significant spectrum reallocation has taken, on average, 13 years to deploy. It is therefore essential for government to take actions to accelerate the spectrum “pipeline” for 5G. Indeed, this is necessary to maintain American leadership in deploying wireless broadband, not only for faster and more robust Internet applications, but to accommodate the predicted explosion surrounding the Internet of Things.

The FCC is therefore to be applauded for adopting a Notice of Proposed Rulemaking (NPRM) to reallocate above-24 GHz spectrum for flexible use, including mobile broadband use, that can accommodate, in part, spectrum needs for 5G wireless. The FCC identified the 28, 37, 39, and 64-71 GHz spectrum blocks as potentially lucrative spectrum to be re-allocated, but identified certain parameters and sharing that it stated would be necessary to accommodate the commercial wireless allocation.
But even this laudable new proceeding likely foreshadows endemic government foot-dragging. It was a little more than a year between adoption of a Notice of Inquiry and the NPRM. It is unclear whether this reallocation timeline will be much different from past lengthy spectrum delays. High-band spectrum, as Commissioner Rosenworcel termed it, has “propagation challenges,” making it useful for high capacity data, but only at very short distances. Thus, this spectrum has the potential for fulfilling some of the needs for 5G. But it does not fulfill the full range of demand for 5G, including more low and mid-band spectrum, as CTIA has recently indicated.

Some Commissioners have raised serious questions concerning whether the proceeding is broad enough to meet 5G needs. And the FCC appears to be resigned to government-commercial spectrum sharing, rather than dedicated commercial use.

The Bi-partisan Budget Act of 2015, now signed by the President, includes the Spectrum Pipeline Bill, which would require identification of 30 MHz of below-3 GHz spectrum for reallocation to commercial use, plus identification of a total of 100 MHz below 6 GHz. Although this effort moves in the right direction, the deadline for the 30 MHz spectrum auction to begin is 2024, well past the expected rollout of 5G; mere identification of the remaining 100 MHz is just as late, scheduled in two tranches for 2022 and 2024. This meager effort is disappointing and codifies into law the overly long reallocation process.
More promising are actions in the Senate. Senator Marco Rubio (R-FL), together with Republican co-sponsors, have proposed the Wireless Innovation Act of 2015, S. 1618. That proposed legislation would require government to identify at least 200 MHz of spectrum below 5 GHz for reallocation to private use, with the earliest auction required by 2018. It also includes incentives to government agencies to encourage giving up spectrum.

The Wi-Fi Innovation Act, S. 2505, co-sponsored by Senators Rubio and Booker (D-NJ), and would require co-allocation of the 5.8 GHz band, currently allocated for intelligent transportation services, to also include unlicensed wireless use. The co-allocation mandate is conditioned on FCC findings that dynamic sharing techniques are available so that the dual uses can coexist without harmful interference.

The proposed Wireless Innovation Act recognizes that government/non-government spectrum sharing is potentially inefficient and may undercut spectrum goals. Sharing proposals often fail to rectify government’s often inefficient use of spectrum, as I have explained in my recent Perspectives. Senator Rubio would reassert the congressional preference for clearing and reallocating government spectrum, relying on sharing only where necessary to preserve essential public safety and national security spectrum uses.

So it is laudable that the spectrum “pipeline” is under construction, and that policymakers recognize the need for prompter action. But the efforts are dilatory and likely not sufficient to meet market needs. For the good of the American consumer and the nation’s economy, let’s hope that policymakers can significantly advance and complete construction faster than it has been able to accomplish in the past.

[NOTE: This piece was written before still somewhat sketchy details of draft legislation prepared by Sen. John Thune began to emerge. Based on press reports, it appears that the draft legislation may address in a positive way some of the concerns expressed in my blog. I will likely have more to say about Sen. Thune's proposal as more details emerge.]

Sunday, November 08, 2015

DOJ Stays Out of Muni Broadband Fight

On November 5, the Department of Justice, without further explanation, informed the Sixth Circuit Court of Appeals that "the Respondent United States of America takes no position" in the appeal of the FCC's order preempting state laws restricting municipal broadband networks.

This is curious.

In fact, here is a statement I gave to the press:

"The Department of Justice's curt statement advising the court that it takes no position in the appeal of the FCC's preemption of state laws restricting local government broadband networks is very curious. As someone who served as FCC Associate General Counsel, I can tell you this is a very rare occurrence. And it is especially curious in this case because President Obama urged the FCC to do exactly what FCC Chairman Tom Wheeler then did. We don't know for sure, but my best guess is that the DOJ, quite rightly, is concerned about the lawfulness of the FCC's preemption action. If so, the concern is justified."

Wednesday, November 04, 2015

San Francisco Voters Reject Airbnb Regulation

On Tuesday, November 3rd, voters in San Francisco rejected the city’s Proposition F, also known as the “Airbnb Initiative,” which would have limited short-term housing rentals to 75 nights a year. Airbnb spent roughly $8 million on organizers and advertisements to defeat the initiative.
Christopher Nulty, a spokesman for Airbnb, said: “This victory was made possible by the 138,000 members of the Airbnb community who had conversations with over 105,000 voters and knocked on 285,000 doors. The effort showed that home sharing is both a community and a movement.”
The price of housing in San Francisco continues to rise rapidly. Proposition F was initiated because policymakers are blaming Airbnb for housing shortages and high rents. However, Airbnb is not the cause of either of these things.
Jared Meyer, Fellow at the Manhattan Institute, wrote a Forbes article where he explains why politicians in San Francisco, not Airbnb, created housing shortages:
San Francisco, where rents for a one bedroom apartment frequently exceed $4,000 per month, has the most serious housing shortage in America. Over the past 20 years, San Francisco only permitted the construction of an annual average of 1,500 housing units. Over that time, San Francisco’s population grew by 97,000. From 2010 to 2013 it grew by 32,000.
According to a Trulia study that examined housing production from 1990 to 2013, San Francisco had the highest median prices per square foot and the lowest rate of new construction permits among America’s ten largest tech hubs.
Nearly 80% of San Francisco’s housing is occupied by rent-controlled tenants or homeowners. This leaves only one in five housing units available for other renters, artificially driving up rents.
Additionally, the booming, high-salary tech industry represents about 8% of the workforce in San Francisco, putting further upward pressure on the price of housing in an already overburdened market. This is why some blame tech workers for the city’s housing shortage. Their solution is for tech companies, such as Google, to create more housing for employees on company property. Although this seems to be a logical proposal, the city of San Francisco explicitly forbids it.
San Francisco, unlike many other major U.S. cities, has building permits that are discretionary rather than as-of-right. This standard makes it more difficult to gain approval for development. For new housing developments in San Francisco, there is a preliminary review, which takes six months. Then there is a chance that neighbors will appeal the permit on either entitlement or environmental bases. These barriers add unpredictable costs and years of delays for developers, the costs of which are ultimately passed on to buyers and renters.
If there is an actual shortage of long-term housing, then it is necessary to allow housing permits to meet this demand, but local California governments stand in the way.
By creating costly regulations and limiting short-term rentals, the "Airbnb Initiative" would have put even more upward pressure on housing prices in San Francisco. Thankfully, voters rejected this unnecessary regulation and now consumers and home owners can continue to benefit from the innovative services offered by Airbnb and other home sharing platforms.