Maryland's Heavy Business Tax Burden Keeps Investment and Jobs Down

Just as businesses compete with other businesses for customers, states compete with other states for new businesses and jobs. By creating economic climates favorable to start-ups and business migrations, states benefit from increased investment and job growth.

But as detailed in the Tax Foundation's 2012 Business Tax Climate Index, Maryland remains one of the nation's least economically competitive states. The Index places Maryland at number 42. That is, the Index designates Maryland's system of business taxes as the 8th worst state in terms of its fostering a favorable business and jobs climate. 

Interstate tax competition, including business tax competition, is especially important in difficult economic times, when job creation is most urgently needed. As the State Business Tax Climate Index explains, "the Index is an important and useful tool for policymakers who want to make their states’ tax systems welcoming to business." Maryland's lawmakers need to take the Index's findings seriously: the state is long overdue for significant tax reforms improve its attractiveness to increased financial investment and job creators.

The State Business Tax Climate Index is based on five weighted components: state corporate taxes, state individual income taxes, state sales taxes, state unemployment taxes, and state property taxes.

Overall, Maryland ranks 42nd in the Index. Maryland's bottom-tier status owes in significant part to the poor economic impact of the state's individual income tax and unemployment insurance tax systems. Maryland's property tax system is also a serious cause of concern.

In terms of state individual income taxes, the Index puts Maryland near the cellar, at 46th place. State individual income taxes have a critically important impact on a given state's economic competitiveness. According to the Index, "a significant number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code." Also, "[t]axes can have significant impact on an individual's decision to become a self-employed entrepreneur." In addition, heavy state income tax burdens reduce the quantity and the quality of the labor force and raises costs for doing business.

The Index points to the individual income tax burdens resulting from states, like Maryland, that permit income taxes at the municipal and county levels. By calculating an average effective local option income tax rate for such states, the Index concludes that "Maryland has the highest average effective local rate, at 1.56 percent of state personal income." Maryland's poor individual income tax rating is also attributed to its imposing a marriage penalty on taxpayers filing jointly as well as its double taxation of capital income – such as ordinary dividends, interest, and cap gains – for which businesses have already paid taxes.

Maryland also has one of the worst overall scores for its unemployment insurance tax system. It ranks 45th in this category. These taxes are paid by employers to finance benefits for recently unemployed workers. Competitive states have "rate structures with low minimum and maximum rates and a wage base at the federal level," along with simpler charging methods. Maryland, however, is among states with the highest minimum tax rates (2.2%) and the highest maximum tax rates (13.5%).

And when it comes to property taxes, Maryland makes a poor showing once more. Out of 50 states, Maryland has the 40th most economically competitive property tax system. For Maryland, this low score results substantially from its wide state property tax base. The state's property taxes include: inventory taxes, real estate transfer taxes, estate taxes, and inheritance taxes.

Keep in mind that neighboring states all fare significantly better than Maryland in the Index's scoring: Delaware (12th), Pennsylvania (19th), West Virginia (23rd), and Virginia (26th). And the consequences of Maryland's business unfriendliness have already been observed. Look no further than Maryland Public Policy Institute's Larry Hogan's May 30, 2012 article, "How Maryland's Tax Rates Are Driving Jobs to Virginia." Citing another Tax Foundation study, Hogan wrote:

Maryland accounted for the largest taxpayer exodus of any state in the region between 2007 and 2010, with a net migration resulting in 31,000 residents having left the state. Where did most of them go? Virginia. Virginia is now home to nearly 11,500 former Marylanders—a shift of $390 million from the tax rolls of one state to another.

Maryland's dismal Index ranking should be another wake-up call to officials and citizens in Maryland. There is urgent need for tax reforms to make the state's economic atmosphere more conducive to investment and job growth. For Maryland to continue on its current path means losing economic opportunities and jobs to neighboring states.

Breaking Down Barriers to Wireless Broadband Build-Out

There is a critical need for expanding infrastructure to meet next-generation wireless traffic demand. Too often, however, local regulatory barriers slow down or stand in the way of the construction of new towers or the upgrading of old ones. Those regulatory barriers delay and drive up the costs of next-generation wireless broadband networks, keeping local economies from realizing the benefits conferred those networks.

Local regulatory barriers to wireless infrastructure build-out were the subject of my Perspectives from FSF Scholars essay, "4G Wireless Networks Need Relief from Cell Siting Barriers: Economy Would Benefit Through New Jobs and Investment." 

In that essay, I called into questions aspects of the Fourth Circuit's ruling in T-Mobile v. Fairfax County Board of Supervisors (2012) that the County Board's denial of cell tower siting permit  did not "effectively prohibit" wireless services. Nonetheless, I pointed out a positive point in the case, arising from the FCC's amicus curiae brief. The FCC rejected the idea that the Section 332(c)'s ban on "effective prohibitions" of wireless services by local governments applies only to "blanket bans" on wireless tower siting by all providers. As I wrote:

[I]n its amicus brief, the FCC reiterated that the restrictions on zoning authority contained in Section 332(c)(7)(B), apply not only to land use applications by the first wireless provider to enter the local market but to siting requests by all subsequent entrants.

A more positive overall result was reached by the Sixth Circuit in T-Mobile v. West Bloomfield (2012). In August, the Sixth Circuit ruled that a local township's denial of a wireless tower siting permit was not supported by substantial evidence and constituted an improper "effective prohibition" on wireless services. Perhaps more importantly, the Sixth Circuit ruled on two matters of first impression for that circuit, namely: (1) whether denial of a single application of a siting permit can constitute an "effective prohibition" or whether the statute only applies to "blanket bans" and (2) whether a "significant gap" in coverage for one wireless provider indicates an "effective prohibition" or whether service provided by a single wireless provider is sufficient. 

Fortunately, the Sixth Circuit rejected the "blanket ban" argument. And it concluded that a "significant gap" by a single wireless provider - combined with a "least intrusive alternative" analysis - should be used for analyzing whether an "effective prohibition" of wireless services exists in a given situation.

I've previously blogged on the importance of local governments accommodating wireless infrastructure build-out in their zoning processes. A smooth process is far preferable to litigation. But where local regulatory barriers make resort to the courts a necessity, it's good to see the Sixth Circuit opt for interpretations of Section 332(c) that are sounder as public policy, more in keeping with Congress's purposes.

Changing the FCC's Analog-Era Mindset

There is almost certainly not a marketplace in the United States today that is as dynamic and rapidly evolving as the communications and information services sector. The reason for this, of course, is that the transition from narrowband to broadband services, from analog to digital technologies, and from monopolistic to competitive market structures, has been well underway for over a decade now.

Despite the FCC's recently acquired reticence to pronounce various market segments "competitive," the evidence nevertheless is strong that the broadband, wireless, and video markets are effectively competitive. It appears the agency's newfound reticence has more to do with wanting to justify the preservation of its regulatory domain than with performing fact-driven competitive market evaluations.

And, make no mistake, the FCC's specific regulatory actions – indeed its overall regulatory posture – matters. No doubt consumers should be protected from abusive practices in the face of demonstrable market failure. But absent market failure, marketplace competition will protect consumers better than the FCC's brand of regulation, which very often is unnecessarily broad, overly anticipatory in reach, and unduly rigid in application.

Stated simply, when the FCC over-regulates and unnecessarily intervenes in the marketplace, investment and innovation are dampened, market structures and business models are frozen in place, competitive entry is discouraged – all with the effect of impeding the completion of the transition to all-IP networks for all.

This is not to say that the Commission, even in recent years, has not taken some welcome deregulatory steps, such as beginning to implement meaningful Universal Service Reform, allowing the partial expiration of the ban on exclusive contracts for satellite programming between any cable operator and any cable-affiliated programming vendor in areas served by a cable operator, or forbearing from enforcing the prohibition on mergers between cable operators and competitive local exchange carriers.

When the Commission has taken such market-oriented actions, I have been happy to applaud them and give the agency, and Chairman Genachowski, due credit. But the reality is that they have been the exception and not the norm.

The norm has been too much regulation in an era of ever increasing competition. The adoption of new Internet regulation in the form of net neutrality mandates is but one example, albeit an important one. Another example is the deleterious practice of routinely engaging in "regulation-by-condition" in the context of reviewing proposed mergers.

To some (lesser) extent, and at some (slower) pace, the digital revolution likely will continue to bring more competition, more consumer choice, and more innovative products at lower prices, even in the face of Commission over-regulation. But surely the extent and the pace of the revolution matters. More investment and innovation, more competition and consumer choice – all more quickly – is better for consumers and for the country.

Here's the crux of the matter. The FCC largely still operates as if it is in the grip of an analog-era regulatory mindset in which the default presumption is the existence of static, monopolistic markets. This analog-era mindset has an air of unreality about it.

Regardless of who wins the coming election, this mindset should change in 2013. A digital-era mindset would find ways to account for a presumption of dynamic, competitive markets. (No reason why it can't change in the last months of 2012, of course.)

To that end, I hope you'll be able to join us for this Thursday's (October 18) Free State Foundation luncheon event at the National Press Club that begins at 11:45 AM. The program is entitled, "Ideas for Communications Law and Policy Reform in 2013." FCC Commissioner Robert McDowell and I will lead off the session with what I'm sure will be a lively, thought-provoking conversation. This will be followed by a free-wheeling panel discussion by four of the nation's leading experts on communications law and policy. Details concerning the program and a registration link are in the sidebar to the right, and you must register to attend because space is limited.

At the forum, we'll discuss both process and substance reforms. Regarding the latter, we will address topics such as reforming the forbearance relief process and the way the agency performs competitive assessments, reforming the transaction review process, revising spectrum policy to relieve the spectrum crunch, completing USF reform, and more. Of course, with a growing sense that the Communications Act needs to be substantially revised, we'll discuss policy reforms that can only be accomplished by Congress.

Please tweet your ideas at: fsfOct18ideasforum. And keep the discussion going on Twitter during and after the event.

Finally, I'll have more to say about this in the near future, but you will be the first to know! The Free State Foundation's latest book, "Communications Law and Policy in the Digital Age: The Next Five Years," will be in print and available in a week. In the book, some of the nation’s most eminent scholars explain why communications law and policy should be changed in response to the profound marketplace transitions taking place. And, as importantly, the contributors explain how law and policy should be changed. In addition to myself, the contributors, all recognized experts on the subjects they address, are: Representative Marsha Blackburn, Michelle Connolly, Seth Cooper, Ellen Goodman, Daniel Lyons, Bruce Owen, James Speta, and Christopher Yoo.

While the book is available on Amazon, Barnes & Noble, and at other outlets, Carolina Academic Press, the book's esteemed publisher, is now offering a 20% discount for orders using the special discount code on this CAP promotional flyer.       

Rising USF "Tax" Rate and Urgency of Reforms

On September 12 the FCC issued a public notice announcing that for the fourth quarter of 2012 the universal service contribution factor will be 17.4%. That's an increase over the previous quarter and almost 2% higher than it stood in the fourth quarter of 2011.

As I explained in my blog post "New USF Tax Adds Urgency to Reform Effort," "the contribution factor translates into the line-item surcharge amount that is added to the interstate long-distance portion of consumer’s monthly phone bills." So consumers will be tapped with a 17.4% surcharge or "tax" on the long-distance part of their monthly phone bill for the next few months.

Below is an updated chart showing the dramatic growth of the USF tax burden on consumers in recent years:

This upward march in USF surcharges and the growth of the fund highlight the need to carry forward the reforms that the FCC begun in its 2011 USF Reform Order. FCC Chairman Julius Genachowski deserves credit for forging ahead with that order, as I discuss in my blog post "Universal Service Reforms Must Continue to be Implemented." Also critical is the FCC's more recent notice on USF contribution reform. We will likely have more to say about contribution reform in the months ahead.

Muni Broadband Project's Gig Service: Fast or Phantom?

Taxpayers Protection Alliance's David Williams re-published a piece in the Chattanooga Times Free Press that questions the hype surrounding a municipal broadband project in Tennessee. Chattanooga's EPB has touted broadband Internet service speeds of 1G. But as the title of the piece asks, "Is EPB's gig service a hoax?"

Given EPB's steep infrastructure investment, one might expect EPB's boasts of stellar service speeds to be plausible. Of course, EPB's infrastructure is funded by local taxpayers and electricity customers—to the tune of $552 million.

However, EPB declined to provide broadband services to a local business enterprise with significant bandwidth capacity demands. Refusing to offer service to the enterprise at EPB's advertised rates, the enterprise turned to EPB's rival Comcast to meet its broadband service needs. Curious.

As we have explained in prior writings, municipal broadband projects across the country have hit local taxpayers hard, precisely at a time when public and private budgets are already on the ropes. 

But EPB appeared to offer a counterfactual, a success story to be emulated by other aspiring local government officials. EPB was even cited by the FCC in its recent Section 706 Report. So answers to questions surrounding EPB certainly deserves close attention.

Now that EPB has been called out it will be interesting to see whether EPB is more about spin than speeds. 

[*Editorial note: this post was edit to reflect that the Chattanooga Times Free Press piece was re-printed but not authored by Mr. Williams.]

The FCC, the Administrative State, and Separation of Powers

On October 11, I am speaking at an event sponsored by Vermont Law School's Federalist Society chapter. The topic is "The Administrative State," with a special focus on what Federalist Papers Nos. 47 and 51 have to say about the role of administrative agencies in our system of government.

This is a very good topic, for which I commend Vermont Law School's students. If I had my way, not just all law students, but all college students, would be required to read at least certain numbers of the Federalist Papers (especially Nos. 10, 47, 48, 51, 55, 70, and 78) before receiving their degrees!

Federalist Nos. 47 and 51 consider the role of separation of powers in our constitutional design, and they contain some of the most oft-quoted language from the papers. At the law school, I plan to discuss how separation of powers principles impact the way we think about the administrative state – or should think about it. With an emphasis on the Federal Communications Commission, I'll consider the nondelegation doctrine, the status of the so-called independent agencies, and the degree of judicial deference accorded independent agencies vis-á-vis the executive branch agencies.

For my purposes here, I am going to focus only on the nondelegation doctrine. An appreciation of the doctrine's derivation from constitutional separation of powers principles, and its purpose, is central to understanding the way in which communications law, and the FCC itself, ought to be reformed.

In Federalist No. 47, defending the proposed Constitution against the contention that it allowed too much blending of the separate departments’ powers, James Madison declared:

"The accumulation of all powers, legislative, executive, and judiciary, in the same hands . . . may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with this accumulation of power, or with a mixture of powers, having a dangerous tendency to such accumulation, no further arguments would be necessary to inspire a universal reprobation of the system."

In support of the idea that separation of powers is essential to preserve liberty, Madison referred to the writings of "the celebrated Montesquieu," who Madison assured us, is "the oracle who is always consulted on this subject."

It is true. Madison and many other Founders were well versed in Montesquieu, the French Enlightenment philosophe. In his most famous work, The Spirit of Laws, first published in English in 1750, Montesquieu had written:

"When the legislative and executive powers are united in the same person, or in the same body of magistrates, there can be no liberty; because apprehensions may arise, lest the same monarch or senate should enact tyrannical laws, to execute them in a tyrannical manner.

Again, there is no liberty, if the judiciary power be not separated from the legislative and executive. There would be an end of every thing, were the same man, or the same body, whether of the nobles or of the people, to exercise those three powers, that of enacting laws, that of executing the public resolutions, and of trying the causes of individuals."

Federalist No. 51 is much to the same effect as No. 47:

"In order to lay a due foundation for that separate and distinct exercise of the different powers of government, which to a certain extent is admitted on all hands to be essential to the preservation of liberty, it is evident that each department should have a will of its own; and consequently should be so constituted that the members of each should have as little agency as possible in the appointment of the members of the others."

While both Nos. 47 and 51 acknowledge that some deviations from strict separation of powers are necessary, and, in fact, are incorporated into the constitutional framework, the emphasis in both is on the role separation of powers plays in protecting liberty and promoting political accountability.

Consistent with separation of powers, Article I of the Constitution provides "[a]ll legislative powers herein shall be vested" in Congress. Now, if this injunction were taken literally, we wouldn't have much of an "administrative state" about which to be concerned. This is because most federal agencies, including the FCC, exercise rulemaking power – that is, the power to promulgate regulations that bind individuals and businesses in the same way that laws of Congress do.

But the injunction is not taken literally. The Supreme Court has accommodated the agencies' exercise of lawmaking power by adopting what is referred to as the "nondelegation doctrine." The Court indulges in the fiction that there has not been an unconstitutional delegation of power, as the Court put it in J. W. Hampton in1928, so long as "Congress shall lay down by legislative act an intelligible principle" to guide the agency in carrying out the delegation of authority.

The rationale for requiring Congress to provide an "intelligible principle" when delegating legislative power to agencies is that we want to be able to hold Congress politically accountable for the policy choices it makes, even if such policy choices are set forth in fairly broad terms.

There are many enabling statutes that contain delegations in which the required "intelligible principle" is pretty difficult to discern. But the Communications Act, which delegates authority to the FCC to regulate in "the public interest," is certainly at the outer reaches of intelligibility. Much of the FCC's regulatory activity takes place under the public interest delegation.

Where's the "intelligible principle" in the public interest delegation?

Well, here’s what Justice Frankfurter said in1940 in FCC v. Pottsville Broadcasting Co. Referring to the new "science of broadcasting," he declared the public interest standard "is as concrete as the complicated factors for judgment in such a field of delegated authority permit."

Read Frankfurter's statement again – slowly, this time – as you try to discern the "intelligible principle" laid down by Congress.

David Schoenbrod, a scholar at New York Law School, has observed the public interest standard says "practically nothing at all" about Congress's goals in the Communications Act. Constitutional scholar Gary Lawson has called the standard "easy kill number one" in terms of statutory provisions that should be invalidated on nondelegation doctrine grounds.

But the fact of the matter is that the public interest standard hasn't been killed. Indeed, in 1943 in National Broadcasting Company v. United States, the Court rejected a contention the public interest standard is unconstitutionally vague.

Even though the Supreme Court has allowed the public interest standard to stand, it is unlikely Madison would be pleased. After all, it is difficult to hold Congress politically accountable for communications policy when so much of the FCC's activity takes place under the public interest standard.

So, the lesson is this. When Congress tackles revision of the Communications Act – as it should, and sooner rather than later – this time it ought to do better by way of setting forth a more determinate "intelligible principle," or principles, to guide the FCC. Given today's competitive marketplace environment, in contrast to the much more monopolistic environment that prevailed when the Communications Act was adopted, the agency ought to be specifically directed by Congress to find the existence of marketplace failure and demonstrable consumer harm before regulating.

If Congress does replace the indeterminate public interest standard with more specific competition-based directives, communications law would be reformed in a way that comports much more closely with fundamental separation of powers principles. Political accountability would be increased. Abuse of government power would be less likely.

Madison would be pleased – and so would I.     

If Forbearance Relief Granted, Transition to All-IP Networks Would Be Hastened

A forbearance petition now being considered by the FCC has important consequences for the future of broadband in the United States. A positive outcome – one that will best promote investment in network infrastructure upgrades and competition in the enterprise broadband services market – is much to be desired.

But such an outcome depends on two critical factors: first, the FCC's adhering to the rule of law; and second, its taking a deregulatory approach to facilitating the transition from copper-based legacy networks to all-Internet Protocol (IP) networks.

The pro-investment and pro-deployment incentives offered by deregulation of enterprise broadband services formed the basis of my prior blog post, "FCC Forbearance Needed to Further Broadband's Benefits." That post regarded a pending CenturyLink forbearance petition. Some of CenturyLink's Ethernet and other broadband enterprise offerings remain subject to dominant carrier and Computer Inquiry tariff obligations. But CenturyLink is not a dominant carrier, the enterprise broadband market is highly competitive, and most of its rivals are not subject to similar regulations. Some of its rivals have even secured forbearance relief from those regulations. Based on those considerations, I made the case for why the FCC should consider CenturyLink's petition in a favorable light.

Nonetheless, opponents of deregulation have called for the FCC to throw up roadblocks to forbearance relief. It has been suggested that the FCC should disregard its deregulatory and court-approved precedents granting forbearance for enterprise broadband services. The agency is being urged to expand its pro-regulatory framework for analyzing forbearance petitions in cases involving legacy voice services to enterprise broadband services. Such an approach would be highly problematic on several counts.

Forbearing from regulating enterprise broadband services would be in keeping with the rule of law. Through a series of orders issued between 2006 and 2008 – its Enterprise Broadband Orders – the FCC granted forbearance relief to several incumbent local exchange carriers (ILECs) from the same regulations at issue in CenturyLink's petition. The U.S. Court of Appeals for the District of Columbia Circuit expressly upheld the FCC's analytical approach and granting of forbearance relief in Ad Hoc Telecommunications v. FCC (2009).  

This clear set of precedents for analyzing forbearance petitions involving enterprise broadband services should straightforwardly apply to CenturyLink's petition. In the time since its Enterprise Broadband Orders, those services have been further deployed and the market has become even more competitive. So there are no good reasons for the FCC to disregard its precedents. And there are certainly no good reasons for CenturyLink to remain subject to disparate regulatory treatment.

Regulatory uncertainty and confusion would almost surely result if the Enterprise Broadband Orders were to be suddenly discarded. Inequity would also result. Such an agency about-face would likely be deemed arbitrary and capricious by a court of law.

Continued FCC adherence to its Enterprise Broadband Orders is also sound policy. As the agency recognized in those precedents, the market for switched-packet data systems is "highly competitive." High financial returns for enterprise broadband service providers incentivize wider infrastructure deployment and market entry. Echoing this point was the D.C. Circuit in Ad Hoc Telecommunications: "Perhaps an obvious point, but a decision that gives owners of telecommunications lines more control over access to those lines tends to increase the incentive for competitors to build competing lines."

In its 2011 USF Reform Order, the FCC reiterated the National Broadband Plan's "express goal of facilitating industry progression to all-IP networks." But discarding deregulatory precedents would undermine that progression. The policy imperative of promoting IP networks is best furthered by forbearing from regulating broadband services. Once relieved of dominant carrier regulations and tariff obligations, enterprise broadband service providers will be empowered to offer more flexible and competitive pricing options to business customers and thereby incentivized to more aggressively invest in broadband infrastructure to meet those customer demands. 

It would be a mistake for the FCC to pull enterprise broadband services under the 2010 Qwest Phoenix MSA Order's framework. That order established an analytical framework for analyzing forbearance petitions that imposed high hurdles to deregulation. I have elsewhere criticized that framework for its over-reliance on static market indicators, narrow market definitions, and misconceptions regarding pricing in networked services that are highly regulated. Similarly, I have pointed to the rule of law problems with the Tenth Circuit's recent decision upholding the FCC's "goalpost-moving" in the Qwest Phoenix MSA Order.

Those problems aside, what is unmistakable is that the Qwest Phoenix MSA Order's framework applied specifically to legacy voice services, not broadband services. That order nowhere indicated that it was somehow supplanting the Enterprise Broadband Orders' analytical approach. To the contrary, paragraph 39 of the Qwest Phoenix MSA Order stated:

Indeed, a different analysis may apply when the Commission addresses advanced services, like broadband services, instead of a petition addressing legacy facilities, such as Qwest’s petition in this proceeding. For advanced services, not only must we take into consideration the direction of section 706, but we must take into consideration that this newer market continues to evolve and develop in the absence of Title II regulation.

This regulatory distinction between legacy voice services and broadband services trades on Section 706's directive that the agency use forbearance to remove barriers to investment in infrastructure for advanced services such as broadband. The distinction also traces back to the FCC's 2003 Triennial Review Order and to its 2005 Wireline Broadband Order, which kept broadband free from unbundling requirements and Title II common carrier requirements, respectively. The Qwest Phoenix MSA Order's framework, by contrast, is steeped in concerns underlying unbundling and common carrier regulations applied only to legacy voice services. Or to put it another way, as the D.C. Circuit declared in Ad Hoc Telecommunications: "Broadband services do not correspond to the old telephone-cable regulatory divide" and both Congress and the FCC have recognized that "regulation of broadband can pose different issues and challenges than regulation of local telephony."

Should the FCC grant CenturyLink's forbearance relief according to the standards established in its Enterprise Broadband Orders, it would comply with the rule of law. In so doing, the FCC would also fulfill the deregulatory purpose of Section 706 by promoting investment in broadband infrastructure and aiding the transition to all IP-networks. At a time when the nation desperately needs additional capital investment and new job creation, this would be a good thing.

FCC Forbearance Needed to Encourage Broadband's Economic Benefits

The FCC is considering CenturyLink's petition for forbearance relief from restrictions on its enterprise broadband services. In several instances, CenturyLink's Ethernet and other broadband offerings to enterprise customers – generally large businesses with major telecom requirements – are subject to legacy dominant carrier regulations and Computer Inquiry tariff obligations. But the competitiveness of the enterprise broadband services market renders such regulations unnecessary and harmful to innovation and investment.

CenturyLink's petition is important not only for the regulatory relief it may afford the company but, more broadly, for what it signals to the market concerning the FCC's regulatory posture. The FCC has a new opportunity to show it appreciates the need to use its forbearance authority to accord relief from outdated and burdensome regulations. Too many times in the past the agency has failed to do so, although it deserves credit for its recent exercise of forbearance authority with regard to the purchase of competitive local exchange carriers by cable operators.   

Rate regulations and disclosure obligations burden CenturyLink's ability to offer competitive prices, particularly since its marketplace rivals have already received forbearance relief. FCC precedents recognize that forbearing from these regulations incentivizes additional investment in broadband infrastructure and enhances competition in the broadband enterprise services market. The FCC should grant CenturyLink's petition promptly.

Enterprise broadband services are highly sought after by businesses with unique communications and information technology needs. Customers in this market are sophisticated and informed, often soliciting services through individualized requests for proposals and hard bargaining with service providers for the best deals. Also, the high financial returns from enterprise broadband services provide strong inducements for infrastructure investment and competitive entry. The market for enterprise broadband services is essentially nationwide in its scope with dozens of competitors, including AT&T, Cox, Charter, Frontier, Verizon, Comcast, TimeWarner Cable, tw telecom, XO, and Level 3.

The innovative and competitive conditions of the enterprise broadband services market calls for a deregulatory policy approach. Reducing regulatory restrictions and relying more fully on market forces offer the best means of ensuring further economic growth and broadband deployment. Such an approach fits closely with the deregulatory purposes of Section 706 of the Telecommunications Act of 1996. That provision expressly calls on the FCC to use forbearance as a way of reducing barriers to infrastructure deployment for advanced telecommunications services.

Beneficial economic results would obtain from enhanced deployment of Ethernet and other broadband-enabled services. Enterprise customers stand to benefit from improved efficiencies in doing business. And enterprise broadband services are increasingly being used by wireless carriers for backhaul transmission of data traffic. Economists have recognized the job growth and other benefits resulting from upgrades to new generations of wireless networks. Backhaul facilities are a critical input for those wireless services.

But as things stand today, some of CenturyLink's enterprise broadband services remain subject to dominant carrier regulations and Computer Inquiry tariff obligations. (In particular, such regulations still saddle CenturyTel-affiliated sevices as well as some Embarq services. Following mergers and acquisitions, those services are now under CenturyLink's umbrella.) The regulated services at issue are broadband-enabled technologies such as Ethernet. All this despite CenturyLink not being a dominant provider. For instance, a Frost and Sullivan estimate ranked CenturyLink as the 4th largest retail provider of Ethernet services for 2010. A Vertical Systems estimate of wholesale Ethernet providers put CenturyLink in 6th place for 2011.

Dominant carrier regulations restrict the ability of CenturyLink to offer flat-rate pricing on a nationwide basis to potential customers and undermine CenturyLink's flexibility in putting together deals. Tariff obligations require CenturyLink to give the public advance notice of its price offerings, giving rivals a jump in luring enterprise customers.

Even worse, CenturyLink must operate at a competitive disadvantage in this lucrative high-tech market because its rivals are allowed to operate free from similar regulatory constraints. CenturyLink's rivals once subjected to dominant carrier and tariff obligations for their respective enterprise broadband services have already obtained the forbearance relief that CenturyLink now seeks. Between 2006 and 2008, the FCC issued a series of forbearance orders regarding such services that can collectively be referred to as the FCC's "Enterprise Broadband Orders." Forbearance relief, or at least partial relief, was granted to AT&T, Embarq, Qwest, and Verizon.

In its Enterprise Broadband Orders the FCC expressly concluded that the market for packet-switched broadband services was "highly competitive." Those orders likewise recognized that the demand for such services is sufficient to incentivize deployment and entry by competitors absent such regulation. And ultimately, the FCC concluded that national market conditions and trends satisfied the criteria for forebearance relief set out in Section 10 of the Communications Act. That is, in those orders the FCC concluded that: (1) regulation was not necessary to ensure availability of services at just and reasonable rates and on a nondiscriminatory basis; (2) regulation was not necessary to protect consumers; and (3) forbearance was in the public interest. 

These considerations add up to a strong case for granting CenturyLink's petition. To recap:

• Granting forbearance relief would encourage further marketplace competition and investment, fulfilling Section 706's directive that the FCC use forbearance to remove regulatory barriers to deployment of advanced telecommunications services like enterprise broadband services.  
• Regulatory forbearance would give CenturyLink needed flexibility to bargain with customers at arms-length. CenturyLink's competitive prospects would likewise be improved without tariff obligations continuously undercutting it.
• Forbearance relief would end the disparate treatment for enterprise broadband services, resulting in regulatory parity for CenturyLink.
• FCC precedents also support forbearance relief for enterprise broadband services, recognizing that deregulation will further unleash the competitive forces already at work in the market, leading to increased investment in broadband infrastructure.

Again, while CenturyLink's case is persuasive, so is the case for the FCC's broader use of its forbearance authority. Hopefully, the FCC will be more receptive than it has been in the past to exercising its forbearance authority – as Congress intended – to cease applying regulations that are no longer necessary.