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Lawmakers Should Strip Ill-Advised Tax Preference for Government-Owned Broadband From Reconciliation Package

Lawmakers Should Strip Ill-Advised Tax Preference for Government-Owned Broadband From Reconciliation Package

September 16, 2021

The current draft of the House budget reconciliation package includes a tax credit designed to support municipal broadband. While this credit is somewhat narrower than some reports have suggested, it is still ill-advised. A tax credit to incent broadband investment in low-income communities is a good idea, but there is no reason it should be limited to municipal deployments.

Muni broadband is generally not something lawmakers should be promoting, because local governments are not well-suited to providing broadband service. Unlike relatively static traditional utilities, such as electricity distribution, broadband requires consistent investment to keep up with technological change. The private sector can better adapt to changes in technology and drive continual improvement to broadband networks. Simply put, municipal broadband not an effective tool to bring any desired improvements to the broadband market, and it is likely to slow investment and innovation over the long-term.

Since the introduction of the American Jobs Plan, the Biden administration has explicitly disfavored private providers in the broadband market, stating that federal investment should prioritize “support for broadband networks owned, operated by, or affiliated with local governments, non-profits, and co-operatives.”

The infrastructure package was negotiated to a reasonable bipartisan position that doesn’t necessarily favor public or private providers. The partisan budget reconciliation package, however, revisits this favoritism for broadband-as-utility over private sector competition, creating a 30 percent tax credit for state, local, and Tribal governments for the operations and maintenance costs of government-owned broadband systems.

As the bill reads going into mark-up, the credit is somewhat limited. It is not open-ended support for municipal networks—that would be a disastrous mistake. It is targeted to pay a tax credit for operation and maintenance costs for connecting households in low-income communities. Expenses are capped at $400 per household, and the home must have not had access to the government-owned service at the beginning of the year. The credit would likely end up flowing to government contractors.

Low-income community is defined relative to statewide median income and aggregated at the level of census tracts. Quite a wide area would be open to this credit—certainly a good portion of every state and part of virtually every major city.

So the credit is not completely open-ended, but still, it is poorly designed. One has to ask, if this is about helping low-income communities gain broadband, why limit the tax credit to municipal providers? Wouldn’t it be good if all broadband carriers had additional incentives to invest in low-income neighborhoods? Wouldn’t that encourage even broader competition, if private new entrants had access to this credit as well?

This mechanism will clearly have a distortionary effect on competition. The bill only requires that the household was not previously served by a network owned by the local government—not that it isn’t served by any network. The vast majority of these households are already served by at least one private provider, and most by two.

There are much better ways to encourage additional broadband investment in low-income neighborhoods than wasteful overbuilding. The argument to include government providers at all in a credit system is tenuous at best, but there is no good reason to exclude private actors from participating. Rather relying on increasingly arcane mechanisms to achieve policy goals by propping up government-backed “competitors,” lawmakers should leverage existing networks.

If the goal is broadly equitable investment in broadband infrastructure, not an ideological predisposition toward government-provided networks, then let’s use the tools we have by building on the competitive model that has served the country well.

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