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The Progressive Fix

The Permanent Campaign: GOP’s Best Laid Plans Endangered

The president’s partial normalization of relations with Cuba spurred widespread Republican fury (with the conspicuous exception of Sen. Rand Paul).  You have to begin wondering if the multiple layers of conservative outrage over the president’s various executive actions could overwhelm the best-laid plans of GOP congressional leaders to make their takeover of Congress appear a calm ascension of governing-minded grownups. Add it up: the president’s environmental executive orders; his climate change agreement with China; his immigration action; and now Cuba–all on top of such “scandals” as Benghazi! and the IRS disrespecting of conservative non-profits that have never achieved any sort of resolution.  Conservatives will demand that “their” new Congress conspicuously address each and every one of these examples of “overreach” and “tyranny,” in a spectacle that will affect perceptions of the GOP going forward even if high-stakes collisions over government funding are somehow avoided.

If that’s not enough, there’s the burning question of what Republicans will do if the Supreme Court at the end of current term invalidates health insurance premium subsidies for millions of people in 36 states.   This week conservative health wonks Yuval Levin and James Capretta proposed that congressional Republicans pass legislation just before or immediately after a decision creating an Obamacare replacement system.  But the instinct of many conservatives if SCOTUS strikes a blow at Obamacare will be simply to celebrate.  And so it is not at all clear that the famous “taming” of the Tea Party branch of the GOP by Republican elites, even if it’s credited as a real phenomenon, will survive the pressures–or to put it another way the presidential provocations–of 2015.


What to Make of a CFO’s Musings on Regulatory Hypotheticals?

In recent days, the net neutrality crowd has seized on select, abbreviated versions of comments by certain executives of Internet service providers (ISPs) as evidence that ISPs are in fact supportive of the public-utility-style regulations being considered by the FCC for internet access service. Even the Chairman of the FCC made hay with the comments to advance his regulatory agenda.

As it turns out, the “gotcha” quotes were amplified in the media, while statements consistent with the “regulation-can-be-harmful” thesis were neglected. Even if we ignore what else those executives said, corporate financial officers (CFOs), or any executive for that matter, don’t have complete say over their firm’s investment decisions. That’s because external investors who lend money to ISPs are equally if not more important, particularly over the long run.

A small helping of investment theory is in order. Tim Karr at Free Press is fond of characterizing the ISP investment decision as an all-or-nothing affair, but in reality, investments (like any decision in economics) are made at the margin. Each project has a different expected return. And even within a project—say, fiber to the home (FTTH)—the expected return will vary depending on the city in which the investment would be made.

As any CFO knows, basic investment theory teaches that a firm invests in a project so long as the internal rate of return (IRR) on a project is greater than the minimum required rate of return, as measured by the firm’s the cost of capital. This is simple, folks: Line up your projects from highest to lowest IRR, and fund the ones that exceed your cost of capital. More »


The Permanent Campaign: Jeb Makes a Move

The potential 2016 Republican presidential candidate many expected to be a late decider or an early withdrawer, former Florida Governor Jeb Bush, made an overt move towards a campaign, announcing yesterday he was seriously considering a run, and also setting up a “leadership PAC” (a personal PAC like most future presidential candidates have to reward endorsees and create a footprint in key states).  This produce a frenzy of speculation about Jeb’s viability, much of it revolving around the “dynastic question” (whether voters are inclined to create a third Bush presidency in less than thirty years) and Bush’s alleged “moderate” heresies and provocations to conservative activists.

Yours truly weighed in with a column that assessed Jeb Bush’s strengths and weaknesses and in the latter category focused on his poor general election polling history, which undermines the “electability” rationale he needs to attract reluctant conservatives.  But I also mentioned his remarkably strong support from big GOP donors, who might well be able to keep a Bush candidacy afloat until a log jam of “true conservative” candidates begins to undergo casualties.

Bush-the-more-likely-candidate was thrown a curve right away by the president’s announcement of an effort to normalize relations with Cuba, an issue that might call his otherwise very valuable Florida background into question as reflecting a certain parochialism.   Jeb’s initial reaction was negative but measured; it will be interesting to see if he feels the need to compete with more outspoken opponents of Obama’s policies (certainly Marco Rubio and probably Ted Cruz) in the next few days.


No Guarantees When It Comes to Telecom Fees

To rebut our estimate of new annual state and local taxes and fees caused by reclassification, Free Press offers two claims: (1) that all of these taxes and fees are preempted by the recent extension of the Internet Tax Freedom Act (ITFA) by Congress, and in the alternative, (2) that the Commission can designate broadband as an interstate service upon reclassification, thereby shielding broadband users from any new state or local taxes. Although the ITFA has been extended, the precise way in which the Commission designates broadband is speculative. Even if broadband is designated as an interstate service, these two elixirs fail to provide the relief for broadband users that Free Press asserts.

The ITFA Claim

In a December 14, 2014 filing with the Commission, Free Press seizes on the recent extension of the ITFA to claim that reclassification would have zero impact on the state and local fees paid by broadband users.[1] Although Free Press previously estimated the new state and local fees caused by reclassification to be $4 billion annually,[2] their revised estimate is apparently zero based on the mistaken assumption that the renewed ITFA will preempt all telecom-related taxes and fees. Free Press claims that our original (pre-extension) estimate of $15 billion is also upwardly biased in light of the extension.

The facts do not bear this out, for several reasons. First, the ITFA pertains to specific taxes such as a “sales or use taxes”[3] as opposed to telecom-related fees. Second, sales taxes constituted only one of several types of taxes and fees we considered.[4] Indeed, in 14 of the states, sales taxes were absent from the list of telecom-related taxes and fees. Third, because extension of the ITFA was uncertain at the time of our initial report, we elected not to exclude those taxes. With the benefit of hindsight, one could revise our estimates downward to exclude these sales taxes, but doing so still leaves a large annual tab for broadband users.[5]

The focus of our report was on state-based telecom-related fees for which there is no federal preemption—not from Congress and not from the Commission.[6] Indeed, the ITFA carves out state-based fees that comprise the majority of our estimate. In a section titled “Exceptions,” the original ITFA explains that the term “tax” excludes: “Any franchise fee or similar fee imposed by a State or local franchising authority, pursuant to section 622 or 653 . . . or any other fee related to obligation of telecommunications carriers under the Communications Act of 1934.”[7] In 2004, the ITFA was amended to permit states and localities to continue to collect “any fee or charges used to preserve and advance Federal universal service or similar state programs.”[8] These exemptions are nowhere to be found in the Free Press analysis. In light of these exemptions, which to our knowledge are perpetuated in the current extension of ITFA, the mere extension of ITFA will not prevent states and localities from continuing to collect all telecom-related fees.

Even with respect to state sales taxes, there is still some uncertainty over how the ITFA would apply. Free Press relies on a legislative history that assumes there is an information component to Internet access, as well as a transmission component.[9] And while it seems clear that the exemption would apply to Internet access if it were classified as a telecom service, or to the transmission component of Internet access if it remained classified as an information service, it is not clear how the exemption would apply to a hypothetical transmission service that is separately offered to end user customers.

Stated differently, the ITFA appears to exempt taxation of transmission when it is an input to Internet access.[10] It is less clear on what happens if the transmission component is offered separately to end users from the information component. This appears to be the approach described by Justice Scalia.[11] It would be very helpful if Free Press and others would explain precisely the service and underlying facilities that they believe should be reclassified, as Justice Scalia did. Without knowing precisely what would be reclassified, there is still some uncertainty over the assessment of general sales taxes on hypothetical broadband transmission services.

The Interstate Designation Claim

In the event that the extension of the ITFA does not afford protection, Free Press offers a backup plan. To negate any telecom-based fees, Free Press claims that the Commission should wave its magic wand and declare broadband service to be an interstate service: It is not a “multiple choice question,” in their words, but instead an obvious conclusion “based on observable facts of how the service functions.”[12] According to Free Press, treating broadband as an interstate service would immunize broadband providers (and thus their customers) from the remaining state-based telecom-related fees, as states have traditionally taxed only intrastate revenues.[13] Free Press is mistaken here as well.

When the Commission previously considered the jurisdiction of Internet traffic, it determined that such traffic was “largely interstate,” but “jurisdictionally mixed.”[14] States routinely tax jurisdictionally mixed services that are classified as “interstate” for purposes of regulation. For example, wireless services may not be regulated by state public utility commissions, but they are subject a host of state and local taxes and fees. In several states, interstate wireless revenues are subject to taxation.[15]

Indeed, the only state or local taxes in our analysis that could be avoided if the FCC were to declare broadband to be an interstate service would be the state-based universal service fees adopted pursuant to state utility commissions. Even here, the protection is not ironclad, as there are a handful of states that assess universal service fees on interstate voice revenues, including South Carolina and Vermont.[16]

It is true that our analysis did not consider state law limitations on the application of taxes and fees to jurisdictionally mixed services that are classified as interstate for regulatory purposes. It is possible that such limitations may mitigate to some extent the effects of reclassification on consumers. Given the widespread application of state taxes and fees on wireless service, however, any such mitigation is likely to be minimal.

———–

ENDNOTES

[1] Free Press Letter, Dec. 14, 2014, at 1 (“Congress’s reauthorization of the Internet Tax Freedom Act (“ITFA”) precludes any new state or local taxes for broadband Internet access, no matter how the Commission defines and classifies it, just as the existing ITFA precluded such taxes before that reauthorization.”) (emphasis added).

[2] Matt Wood, “Claims That Real Net Neutrality Would Result in New Internet Tax Skew the Math and Confuse the Law,” Free Press Blog, Dec. 2, 2014, available at http://www.freepress.net/blog/2014/12/02/claims-real-net-neutrality-would-result-new-internet-tax-skew-math-and-confuse-law

result-new-internet-tax-skew-math-and-confuse-law (last accessed on Dec. 3, 2014) (“Even if you used PPI’s fuzzy math, this would amount to approximately $4 billion in total, nowhere near the $15 billion sum Singer and Litan cite.”).

[3] ITFA, Sec. 1104, 8 (A)(ii) (signed as Public Law 105-277 on October 21, 1998).

[4] For 14 of the states in our sample, there was no general sales tax. For the 36 states with a general sales tax, the average state sales tax was 5.5 percent.

[5] Zeroing out all sales taxes (state and local) in those states reduces our midpoint annual estimate of new state and local fees from $15 billion to $11 billion. It bears noting that we conservatively assumed no increase in the federal program demand, which resulted in a modest $0.5 billion lift in federal fees paid by residential broadband users, as the consumer contribution (compared to business) of broadband revenues (which would be newly added to the fund’s revenues) is proportionally greater than the consumer contribution of long-distance revenues. To the extent that federal program demand increases from reclassification—due to the enhanced political pressures associated with deeming broadband a public utility—the reduction in state and local fees caused by the extension of the ITFA could easily be offset by an increase in federal fees.

[6] In the same December 2, 2014 Free Press blog posting, Free Press argued that the Commission could preempt these state-based fees: “Just as the FCC can decline to extend USF assessments to retail broadband access at this time, it also has the authority to preempt states from doing so.” Section 253 of the Act authorizes the Commission to preempt state laws that would impair a carrier from providing interstate or intrastate telecom services. But assessing fees on broadband providers would not impair a firm from providing broadband services. At most, such fees would reduce broadband penetration by squeezing out marginal (price-sensitive) customers.

[7] ITFA, Sec. 1104, 8 (B) (emphasis added).

[8] ITFA, Sec. 1107, A (amended Apr. 29, 2004).

[9] Free Press Letter, at 4 (citing Report of the Senate Committee on Commerce, Science, and Transportation, “Internet Tax Non-Discrimination Act of 2003,” S. 150, S. Rep. No. 108-155, at 2, Sept. 29, 2003).

[10] ITFA, Sec. 1104(2)(B)(i) (amended Apr. 29, 2004).

[11] Scalia Dissent, NCTA v. Brand X Internet Service, ¶96 (“Since the delivery service provided by cable (the broadband connection between the customer’s computer and the cable company’s computer-processing facilities) is downstream from the computer-processing facilities, there is no question that it merely serves as a conduit for the information services that have already been assembled by the cable company in its capacity as ISP.”).

[12] Free Press Letter, at 3.

[13] Free Press Letter, at 5 (“This means that states will not apply to broadband any taxes or fees, including universal service fund assessments or contributions, that apply solely to intrastate telecommunications services.”).

[14] FCC adopts order addressing dial-up internet traffic, Feb. 25, 1999, available at http://transition.fcc.gov/Bureaus/Common_Carrier/News_Releases/1999/nrcc9014.html.

[15] Scott Mackey & Joseph Henchman, Wireless Taxation in the United States 2014, Tax Foundation Fiscal Fact, Oct. 2014, Appendix A.

[16] Vermont Public Service Board, Universal Service Funds, available at http://psb.vermont.gov/utilityindustries/telecom/backgroundinfo/vusf; 2014 South Carolina Universal Service Contribution Worksheet, available at http://www.regulatorystaff.sc.gov/TTWWW/2014%20SC%20USF%20Contribution%20Worksheet%20Instructions.pdf (instruction that interstate revenues must be reported).


The Permanent Campaign: Senate Prez Possibilities Give Cromnibus Wide Berth

The “Cromnibus” bill (the FY 2015 omnibus appropriations bill with two months of funding for the Department of Homeland Security) cleared the Senate on Saturday by a relatively comfortable 56-40 vote (after an even more spacious 77-19 margin for cloture), it’s interesting that solons with reported interest in high office mostly gave the legislation a wide berth.

Among the Republicans most often “mentioned” as potential 2016 presidential candidates, Ted Cruz, Rand Paul and Marco Rubio all voted against the bill and before that against cloture.  Only John Thune, mysteriously a continuing presidential favorite inside the Beltway (and one who hasn’t taken himself out of contention) voted for the bill.

Among Democrats, Elizabeth Warren obviously opposed the bill (and less obviously cloture), and was joined on both votes by “mentioned” Democrats Bernie Sanders and Sherrod Brown.

There’s one other vote of particular interest: Cory Booker, often “mentioned” as a future presidential candidate, though probably further down the road than 2016, voted “nay” on the bill (though not on cloture).  Booker has frequently been criticized for being too cozy with Wall Street interests.  He’s now supplied a contrary data point.  But in a floor speech on the bill, Booker (a former mayor) emphasized even more the bill’s interference with D.C.’s home-rule prerogatives in legalizing cannabis possession and home-growing.


The Permanent Campaign: Rift Opens Up Among Democrats

One of the most beloved and perpetual media narratives in Washington is “Democrats in Disarray.”  But if  relatively minor intraparty divisions are often blown up into “fights” and “civil wars,” sometimes serious differences of opinion do emerge. That may well be what happened yesterday when the White House whipped House Democrats to support the “cromnibus” appropriations bill against the wishes of House Democratic Leader Nancy Pelosi and the Senate Democratic Caucus’ big star, Elizabeth Warren.

While technically, the administration (and for that matter the Senate Democrats who negotiated the key concession to Republicans on derivatives swaps) opposed a controversial change to the Dodd-Frank financial reform legislation, the White House made it plain when push came to shove that it did not want to risk losing negotiated year-long appropriations levels for non-DHS federal agencies over it.  And so a not-so-secret division among Democrats over the broad question of the party’s relationship with Wall Street–with a sizable number of “populists” calling for open hostility as a party-defining attitude–was pushed into the limelight just hours after the big question was whether Republicans had sufficiently undermined conservative sentiment for brinkmanship over the president’s immigration policies.  Liberal unhappiness about the White House’s handling of the “cromnibus” could spill over into Senate deliberations on the nomination of former Lazard official Antonio Weiss to a high-level Undersecretary gig at Treasury, which is already in trouble after several Democrats–following Warren’s lead–came out against him, including Jeanne Shaheen and Joe Manchin, hardly fire-eating lefties.

As Danny Vinik notes at The New Republic, we could look back a year from now and decide this was the week that led Warren to take on a primary challenge to Hillary Clinton.   Perhaps she will make a Sherman Statement directly and allay such talk.  But it’s a lot more substantive than it was a few days ago.

 


The Permanent Campaign: Relative Stability in the States

As Washington focuses on the fate of the “Cromnibus” (the Omnibus Appropriations Bill for nearly all of the federal government plus a two-month CR for the Department of Homeland Security), the less nationally noted but still locally dramatic biennial phenomenon of gubernatorial transitions is underway.

The 2014 cycle (with 36 gubernatorial elections) produced just eleven new governors.  Four are Republicans succeeding Democrats (in Arkansaas, Illinois, Massachusetts and Maryland), one is a Democrat succeeding a Republican (in Pennsylvania), one is an independent succeeding a Republican (in Alaska), and the other five are intraparty transitions (in Arizona, Hawaii, Nebraska, Rhode Island and Texas).  That’s a dramatically lower number than in 2010 (twenty-six new governors).

Perhaps not coincidentally, 2014′s close races produced an unusually high number of governors elected without a majority of the vote: ten (five Democrats, four Republicans and one independent).  A lot of incumbents held on, but barely.

 


Consumer Bills Could Soar Under Title II

If the FCC decides to define broadband service as a telecommunications service, broadband services would become subject to state fees that apply to telecom services.  The attached report by PPI Senior Fellow Hal Singer and Brookings Institution Non-Resident Senior Fellow Bob Litan quantifies these new fees.

  • New State and Local Fees: Average annual increase of $67 for wireline broadband and $72 for mobile broadband. All told, American consumers could pay $15 billion in new state and local fees.
  • Real-World Example: For a Maryland household with one wireline and two wireless broadband connections, the monthly increase in state and local fees could be as much as $34; in California, the monthly increase for a comparable household could reach $44. These figures do not include any new federal charges, which would raise the monthly cost further.

Top 5 States by New Wireline Fees

  1. California (up to $167.09 per year)
  2. Alaska ($148.34)
  3. Pennsylvania ($144.90)
  4. Louisiana ($141.49)
  5. Illinois ($138.79)

Top 5 States by New Mobile Broadband Fees

  1. California (up to $178.82 per year)
  2. Pennsylvania ($154.64)
  3. Alaska ($153.88)
  4. Louisiana ($153.12)
  5. Oklahoma ($149.80)

Regulating Broadband as a Telecommunications Service Will Subject Consumers to Billions in New Fees

(Calculations Assume One Wireline and One Wireless Connection Per Consumer)

State Monthly Increase Range Annual Increase Range
Alabama $9.41 – $9.41 $112.95 – $112.95
Alaska $16.14 – $25.19 $193.66 – $302.22
Arizona $9.05 – $16.30 $108.63 – $195.62
Arkansas $6.65 – $20.68 $79.78 – $248.15
California $4.87 – $28.83 $58.49 – $345.91
Colorado $4.80 – $19.75 $57.63 – $236.95
Connecticut $7.40 – $7.40 $88.75 – $88.75
Delaware $1.36 – $1.36 $16.32 – $16.32
Florida $5.32 – $11.98 $63.81 – $143.72
Georgia $12.15 – $17.12 $145.79 – $205.49
Hawaii $11.94 – $11.94 $143.25 – $143.25
Idaho NA NA
Illinois $8.07 – $23.68 $96.84 – $284.18
Indiana $9.72 – $9.72 $116.61 – $116.61
Iowa $7.61 – $8.55 $91.36 – $102.57
Kansas $7.05 – $9.62 $84.56 – $115.43
Kentucky $9.14 – $20.31 $109.69 – $243.67
Louisiana $19.57 – $24.55 $234.83 – $294.61
Maine $6.23 – $6.23 $74.78 – $74.78
Maryland $18.01 – $22.41 $216.10 – $268.90
Massachusetts $7.51 – $7.51 $90.08 – $90.08
Michigan $6.97 – $14.37 $83.62 – $172.42
Minnesota $9.65 – $10.45 $115.81 – $125.36
Mississippi $10.55 – $10.95 $126.63 – $131.43
Missouri $4.11 – $17.02 $49.37 – $204.29
Montana $5.99 – $5.99 $71.86 – $71.86
Nebraska $7.06 – $14.90 $84.67 – $178.82
Nevada $5.56 – $10.24 $66.73 – $122.84
New Hampshire $7.81 – $7.81 $93.69 – $93.69
New Jersey $8.35 – $8.35 $100.17 – $100.17
New Mexico $11.08 – $17.17 $133.02 – $205.98
New York $13.04 – $19.93 $156.47 – $239.21
North Carolina $7.79 – $8.03 $93.53 – $96.33
North Dakota $10.04 – $15.61 $120.50 – $187.37
Ohio $6.89 – $8.52 $82.64 – $102.28
Oklahoma $5.50 – $23.98 $66.05 – $287.73
Oregon $6.63 – $8.50 $79.57 – $102.02
Pennsylvania $20.37 – $24.96 $244.39 – $299.54
Rhode Island $11.84 – $11.84 $142.13 – $142.13
South Carolina $10.16 – $18.44 $121.87 – $221.26
South Dakota $13.48 – $18.15 $161.72 – $217.85
Tennessee $16.13 – $21.19 $193.54 – $254.26
Texas $6.78 – $17.59 $81.33 – $211.06
Utah $7.04 – $11.57 $84.43 – $138.86
Vermont NA NA
Virginia $8.54 – $9.00 $102.46 – $107.98
Washington $8.45 – $22.02 $101.38 – $264.25
West Virginia $3.00 – $11.87 $35.94 – $142.45
Wisconsin $6.59 – $8.74 $79.09 – $104.86
Wyoming $5.72 – $7.15 $68.60 – $85.83

For more information, see Litan and Singer’s policy brief, “Outdated Regulations Will Make Consumers Pay More for Broadband.


The Permanent Campaign: Can Donors Cull the 2016 GOP Field?

Anyone looking towards the starting line for the 2016 Republican presidential nomination campaign has got to wonder how and when this gigantic field gets “culled.”  Sure, it will eventually happen once voters start voting, but how about in the Invisible Primary where party elites get to put their thumbs on the scales?  It’s a particularly big issue to the Republican Establishment types who are used to backing a front-runner, but are now looking at the possibility of overlapping and redundant “mainstream” campaigns from Jeb Bush, Chris Christie, Marco Rubio, and perhaps Mitt Romney–none of them other than Romney looking all that strong in the early polls.

The New York Times‘ Nick Confessore is reporting that big Establishment donors are talking about cutting to the chase by agreeing to unite behind one candidate, presumably trashing their other favorites as non-viable.

The conversations, described in interviews with a variety of the Republican Party’s most sought-after donors, are centered on the three potential candidates who have the largest existing base of major contributors and overlapping ties to the top tier of those who are uncommitted: Gov. Chris Christie of New Jersey, former Gov. Jeb Bush of Florida and Mitt Romney.

All three are believed to be capable of raising the roughly $80 million in candidate and “super PAC” money that many Republican strategists and donors now believe will be required to win their party’s nomination.

If true, this is really bad news for Rubio, who’s not even in this conversation.  But it also creates the risk of major blowback from conservative activists who are struggling with their own “culling” process, and might well react angrily to efforts to place someone in the position Romney was in at this point four years ago–especially if it’s Romney himself.