Effect of net neutrality rules on taxes is uncertain

Does net neutrality mean a big tax increase?

The Federal Communications Commission just approved a proposal reclassifying Internet service as a telecommunications utility -- claiming that it will preserve the concept of net neutrality. While proponents of the policy shift argue that the changes won’t spur additional fees or taxes, opponents argue the opposite.

"This is essentially a massive tax increase on the middle class being passed in the dead of night without the American public really being made aware of what is going on," Sen. Mike Lee, R-Utah, wrote in an email through the anti-FCC regulation group Protect Internet Freedom.

On the other hand, FCC spokesperson Kim Hart told PolitiFact that the policy "does not raise taxes or fees. Period."

Who’s right here? Estimates of the impact on consumers -- in terms of Internet service bill fees and taxes -- range from $0 to $11 billion. Politicians can make a case that the policy will bump up service bills for the 85 million households with Internet, but there are too many unknowns to make such a definitive statement as Lee’s.

The proposal

Net neutrality is complicated. In general, it’s the idea that Internet service providers (like Comcast) should not be able give preferential treatment to one website over another.

Accordingly, the solution is also complex. The FCC voted to reclassify Internet service providers as common carriers under Title II of the Telecommunications Act, meaning they will be treated as public utilities, like phone service -- subject to more regulation than they are now. (A previous fact-check covered this in more detail.)

The full text of the proposal wasn’t available to the public before the vote, when Lee made his comments, though its general principles were widely understood. But, a fact sheet says it "will not impose, suggest or authorize any new taxes or fees."

More importantly, Congress recently reauthorized the 1998 Internet Tax Freedom Act, which bans new taxes on Internet service. There’s legislation in the works to make this law permanent. That means the FCC couldn't levy taxes on its own even if it wanted to. 

There’s a big caveat, though. The Internet Tax Freedom Act bans taxes, but not fees. Fee revenue is set aside specifically for, in this case, a telecom-related service. Taxes, in contrast, raise general revenue. They’re legally different, but functionally the same from the consumer’s perspective. Many experts say consumers can expect additional fees.

Some say the FCC has left the door open for attaching federal-level fees in the future. Regardless, the FCC can’t stop states and municipalities from tacking on their own fees.

The estimates

The nationwide annual impact on Internet broadband subscriber bills could reach a maximum $11 billion, as a result of new taxes and fees, according to a December report out of the Progressive Policy Institute, a center-left think tank (it identifies with former President Bill Clinton’s New Democrats). They recently lowered their estimate from $15 billion.

For the study, the researchers assumed that state and local governments would take every fee currently applied to a telecom service and apply them to internet service -- because household Internet will become a telecom service.

For example, the state of California charges telecom companies fees for special telecom-related services for the deaf and disabled, among other programs. Companies then pass these fees along to consumers.

It makes sense that a state would want to apply already-established telecom fees to Internet service to increase revenue, said study author Hal Singer, in an interview with PolitiFact. He pointed out that Vermont’s director of telecom services has said the state would strongly consider levying fees on broadband Internet for the purpose of increasing Internet accessibility.

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Some net neutrality experts take issue with the study because of what the authors chose to include or leave out.

"The PPI study has been thoroughly discredited," said Joshua Stager, policy counsel at the Open Technology Institute, noting that it was "disingenuous" of the study to ignore the Internet Tax Freedom Act in the first place.

There is no guarantee that every state would choose to levy every fee. In some states, the legislatures would have to take action before it could happen. The report also assumes that federal fees will apply, but that’s still up in the air.

Taking a different look at the PPI findings, the Free Press advocacy group argues that the potential fee burden could be around $4 billion, or as little as nothing. (Though Singer fervently rebutts their argument.)

Personal finance website Nerd Wallet did their own assessment and settled on a possible $6.25 billion impact. They broke their estimates down by state and found that households would see an annual increase in their Internet service bills anywhere between $8 in Delaware and $131 in Pennsylvania. They estimate that the average American household will see their bill increase $67 annually.

"I’d say claiming that this order will be a ‘massive tax on the middle class,’ is an overstatement," said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. "But it is also true that we will likely see new fees on broadband as a result of reclassification."

Our ruling

Lee said the FCC’s net neutrality policy "is essentially a massive tax increase."

Literally, there won’t be any new taxes as a result of the FCC changes, but there will likely be additional fees. There’s a wide range of estimates -- anywhere from zero to $11 billion a year. Lee’s comment doesn’t account for the fact that the impact on consumers’ service bills is far from certain, and a telecom policy analyst said it's an overstatement to call the potential increases "massive."

The statement is partially accurate but leaves out important details, so we rate it Half True.