The Right Broadband Stimulus Package

The stimulus package being considered by Congress presents a once in a generation opportunity to upgrade our nation’s broadband infrastructure, but only if the proposals are based on pragmatic logic rather than ideological wishful thinking.

Congress will hopefully include a sizeable investment in broadband infrastructure in the stimulus package expected to pass next month. As ITIF will show in a forthcoming report, spurring investments in broadband and other network infrastructures (like health IT and green grid) can create a significant number of new good jobs. And if the package is designed in the right way, a large share of these jobs can be created in 2009, bringing much needed short-term economic stimulus. Moreover, the advantage of spurring investment in smart networks is that unlike stimulus measures that support consumer spending, these investments will spur productivity growth and other societal benefits, including improved education, better health care, and reduced greenhouse gases.

But if broadband is to be a sizeable component of the stimulus, it is critical that the measures are ones that get the most broadband built or most people added to the network in the quickest way. Unfortunately, some broadband advocates see the stimulus package as a golden opportunity to advance their own particular agenda with policies that will end up spurring much less broadband investment in 2009 and 2010 than is possible with more pragmatically designed proposals.

Case in point is the recent report by Free Press, a DC-based media reform organization. To their credit Free Press has rightly called for a sizeable investment ($44 billion over 3 years) in broadband as part of a stimulus package. Unfortunately, few of its proposals are likely to spur significant broadband investment - and by definition jobs - in the next year or two. This is because they designed to advance the Free Press agenda of getting open networks and even more broadband competition. One can have a legitimate argument about the merit of using scarce taxpayer dollars to pay for redudent “pipes” to the home in what are, at least at this time, natural duopoly markets. However, any broadband proposal made as part of a stimulus package should have as its major goal getting money on the street in “shovel ready” projects as quickly as possible.

Unfortunately, many of the Free Press ideas fail that test. For example, they propose a $10 billion Bonds for Broadband Program that will be “particularly attractive for Competitive Local Exchange Carriers (CLECs).” The problem is that there are few CLECs to take advantage of such a program. Even more problematic is the fact that a bond program takes a while to get investments actually built. Projects have to be developed, bond proposals made and approved and sold, and finally money allocated. All this takes time, plus in today’s financial market there is no assurance that anyone will buy bonds that are likely to be seen as risky.

Any broadband stimulus program that seeks to spur investment and jobs in 2009 needs to include tax incentives to companies deploying broadband. The advantage of tax incentives is that they are available on day one after legislation is signed and are easy for companies to implement. Unfortunately, less than 20 percent of the Free Press package goes to direct tax credits. Moreover, the restrictions on the use of the credits are so limiting that few of the credits will likely be claimed. For example, in their effort to build the redundant third pipe to the home, almost two-thirds of their tax credits would go to a Competitive Fiber Tax Incentive Program to build fiber networks shared by multiple competitors. There are three problems with this. First, it assumes that the only way to get high speed networks is with fiber. But DOCSIS 3.0 technology being deployed by cable companies that can result in very high speeds networks would not be eligible. Second, the proposal assumes that the incentives will spur companies to deploy fiber to the home. But only one major broadband provider, Verizon, is currently deploying fiber to the home. It is highly unlikely that other telecos or cable companies would be able to switch their entire investment strategy in a year or two to deploy fiber to the home, no matter how generous the incentive is. Finally, it is doubtful that incumbents would agree to open up their networks for other companies to provide service over in exchange for a modest tax credit.

So what is needed? If Congress is serious about using the stimulus package to really drive broadband deployment in 2009, it needs to ensure that a sizeable portion of any stimulus package is focused on tax credits to companies to deploy broadband to areas without it and to expand speeds in areas with it.

To do the first, Congress should institute a two-tier tax credit consisting of a 30 percent tax credit to bring broadband services to higher-density areas (even in these predominantly rural locales) containing a population density of greater than 20 dwellings/businesses per square mile and a 60 percent tax credit for bringing broadband services to low-density areas with population densities of less than 20 dwellings/businesses per square mile.

To do the second, Congress should provide a tax credit on capital expenditures for next generation broadband networks. But to avoid rewarding companies for investments they would have likely made, the credit should apply only to those investments 2009 capital expenditures that exceed 85 percent of 2008 levels. Two levels of tax credit should be provided, a 20 percent tax credit for investments that deliver speeds of at least 20 mbps down and 5 mbps up, and a 40 percent tax credit for investments delivering speeds of at least 40 mbps down and 10 mbps up.

While tax credits are needed, they can't get us all the way there. That’s why Free Press is right to also call for grant funds. These should be focused on supporting broadband deployment in truly high cost areas and for strategic investments, such as to schools and libraries.

And finally, as Free Press notes, any program needs to also spur broadband demand, especially among lower income households. To do this, ITIF recently proposed extending support for computer purchases and broadband service to low income families through the existing Lifeline and Linkup programs.

The goal of stimulus should be straightforward: to get as much bang for the buck for a struggling economy is a fast a manner as possible. If this can be done by spurring investment in network infrastructures like broadband that also achieve other national objectives like spurring productivity growth, improved health care, or reduced carbon emissions, so much the better. But the focus should be on getting the job done in an expeditious and cost effective manner, not on proposals that run this risk of spurring little investment in the hope for more open networks or a revitalized CLEC industry.