Congress is considering whether to allow a ban on taxing Internet access to expire.
Taxing Internet access would be a bad idea. Consumers remain sensitive to the price of broadband, and because taxing price sensitive goods can significantly reduce demand, taxing Internet access is likely to have a negative effect on subscribership.
Given Congress's recent hand-wringing about broadband availability and takeup it would be ironic if it were to endorse a policy sure to reduce broadband's growth rate.
Why would taxing Internet access have this negative effect?
Taxes should be collected in the most efficient way possible. From an economics perspective, that means taxes should be imposed in ways that have the least impact on consumer behavior. Taxes that cause consumers to change their behavior are generally harmful to the economy and our well-being (that is, they create "deadweight loss" unless those taxes are specifically intended to discourage harmful behavior).
Because tax mechanisms should avoid unintentionally changing consumer behavior, policymakers should exercise caution when imposing taxes on price-sensitive activities since price increases on such goods are likely to substantially affect demand.
Broadband remains price sensitive. Ken Flamm, an economist at the University of Texas, estimated in a 2005 paper an own-price elasticity of -0.22 for broadband. Other estimates estimate price elasticity to be much higher: around -2.**
Consumers would view new taxes on Internet access as a price increase, thereby reducing demand for broadband.
Taxes on telecommunications services in general have long been recognized as among the most inefficient taxes levied. Economists have argued for reducing these harmful taxes and raising required revenues through the general taxation system instead.
The old system of taxing telecom service was bad. Taxing Internet access while also calling for to increased broadband penetration would be contradictory, at best.
** NOTE: I have somewhat modified this entry in response to Greg Rosston's insightful comment. The paragraph above denoted with two asterisks (**) originally read:
Broadband remains quite price sensitive. Ken Flamm, an economist at the University of Texas, estimated in a 2005 paper an own-price elasticity of -0.22 for broadband. In other words, he found that a 10 percent increase in broadband price would reduce demand by 2.2 percent.