Originally published by The Hill here.
In recent years, many in Washington haven’t been shy about their goal to tax and regulate the Internet. After all, a relatively unregulated and tax-free economic sector is quite a temptation for the money pit that is D.C. But with a new cadre of leaders in town following Tuesday’s historic shift, will Democrats still have the will to follow through? More importantly, will Republicans stand for it?
Why are so many passionately concerned about the Internet in the first place? Not only does everyone, from my two-year-old daughter to nursing home octogenarians, have a Facebook page, but the Internet has become a prominent economic driver that no one could have anticipated. In the ‘90s, investments in Internet-related businesses accounted for about one-third of all economic growth, resulting from more than a trillion dollars in private investment. Even during those oft-missed full-employment years, more than two million jobs were created in this sector, while in the early 2000s, more than 9.3 percent of GDP growth is owed to similar investments.
Even today, billions are poured annually into investments related to the Internet and millions are employed because of it. Perhaps even more remarkable is the fact that one of the few sectors of the economy that D.C. hasn’t infiltrated has also proven to produce the most equitable opportunities for low-income and minority households in the U.S.
But legislators and regulators are starting to consider this economic frontier as our economy’s Wild West, in desperate need of oversight and ripe with opportunity for government revenue generation. The new Republican leadership, however, sees things differently . . . and should.
Taxing the Internet, Taxes Everyone
“People pay taxes, businesses don’t.” Too many elected officials don’t want to believe it, but this follows the basic idea of tax incidence taught in early economics courses. When businesses incur higher costs, they pass those on to employees and consumers. Think your company is picking up the tab on their half of your FICA tax? They’re not. You are paying at least a portion of that in the form of a lower salary or benefits.
Some in D.C. either don’t understand this or, more probably, don’t care. They want government revenues to fulfill their policy objectives regardless of the economic impact. To do so, they’ve conjured a number of creative ideas, including the Marketplace Fairness Act (MFA), which would force out-of-state online retailers to collect taxes from a state’s citizens, and return it to state governments where the purchases were made. Imagine you are a small online retailer that potentially has to remit taxes to the 45 states that currently have sales taxes. Even with snazzy new software (e.g. Amazon, a supporter of the MFA, has just such a solution . . . for a fee) the economic burden on up to 3.5 million retailers will be substantial.
Although the Internet Tax Freedom Act has been successful at blocking Congressional attempts to tax access to the Internet, it doesn’t prevent the FCC from implementing its own “fee” increases on broadband access. If they do so, it will be the most visible direct tax on Internet access that nearly everyone in America will be able to see on their monthly bill.
Republicans I spoke with before the election were dead-set on fighting these policies. After the midterms, they have a little more ammo and will be happy to take aim if Democrats, or the FCC, try increase costs to providers or consumers before they are officially welcomed to Capitol Hill.
Everyone wants a “free and open” Internet. Unfortunately, not everyone knows what that looks like. Advocates from around the country have become convinced that the idea of “free and open” is only possible if the FCC is allowed to reclassify internet service providers, raise fees on Internet services, and increase the number of regulations that businesses must comply with, limiting the number of businesses able to offer services. Seems like the opposite of free and open to me, but what do I know.
Although there has yet to be anyone who can demonstrate consistent consumer harm that has resulted from the existing regulatory environment, the fear of the unknown is apparently enough to prompt panic that can only be relieved through increased oversight. In an attempt to make everyone happy (which will inevitably make no one happy as the old adage goes), news has spread that the FCC is now considering a “hybrid” policy, increasing the regulatory burden on only a portion of internet providers’ services. There are two important concerns (among many) that regulators should realize: 1) Even a partial increase in regulatory compliance, is a major cost shift to one of the fastest and most influential sectors of our economy, and 2) Have we not learned anything from the thousands of businesses who continue to find ways to circumvent the increasingly complicated tax code? Businesses with the means will find a way around a so-called “hybrid” policy, while the small businesses without will be forced to bear the burden.
If the FCC decides to act in this manner, Republicans will likely fight against what they will perceive as an unacceptable overreach and attempt to circumvent their long-held decision to leave the Internet as-is.
Although many were shocked by the midterm beating, Democratic leaders read the tea leaves well in advance and have been preparing for just such a situation. Expect intense policy pushes by those packing their bags to exit the Beltway with nothing to lose. But let’s hope that those with more far-sighted career ambitions realize what the rest of the country did on Tuesday: more taxes and regulations, especially within a prosperous sector like the Internet, will not be beneficial to the economy, nor its millions of small businesses and employees.
Vélez-Hagan is executive director of The National Puerto Rican Chamber of Commerce, economic policy researcher at the University of Maryland-Baltimore County, and author of the upcoming book, The Common Sense behind Basic Economics (2015). @JVelezHagan