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Title II: a New Way to Tax the Internet

Mike O’Rielly, a commissioner at the Federal Communication Commission (FCC), is arguing that President Obama’s new proposal on Net Neutrality will result in an immediate tax on internet service providers (ISPs), which will then be passed on to consumers and result in across the board higher prices. The statement issued by the president contains no language pertaining to anything like a tax, though, so what’s he talking about?

The answer lies in the push to reclassify ISPs under Title II of the Federal Communications Act of 1934 (later updated to the Telecommunications Act of 1996.) Since a federal appeals court ruled that the FCC was exceeding its authority in implementing Net Neutrality, Title II reclassification has been proposed as a way around the ruling.

The Telecommunications Act is a massive piece of legislation, however, with a great number of obscure provisions and unforeseen consequences. One such provision, the one to which O’Rielly is referring in his comments, requires telecommunications companies to pay into a “Universal Service Fund” for the purpose of supporting access and infrastructure for remote rural areas.

Section 254(d) states “Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service.”

These contributions are far from trivial. In the fourth quarter of 2014, the FCC announced that the charge to telecommunications companies would be 16.1 percent of end user revenues. When companies face a cost increase like this, they do not simply absorb it. Instead, they pass it on to consumers in the form of higher prices to the extent they can get away with it without losing business. Additionally, the incentive for companies to keep prices low in order to remain competitive does not exist in this case, since every ISP will be hit with the same cost increase simultaneously.

Time Warner Cable has reported its average monthly charge for internet is about $47. The FCC’s rate increase would bring this to $54.57, an increase of more than $90 a year, and this does not include any further increases we might see as a result of higher compliance costs with the new regulations. Imposing additional costs on consumers through government fiat so that the FCC can increase its own revenues is unquestionably a step backwards for internet freedom.

Even the FCC has pushed back against the president on Title II regulation. FCC Chairman Tom Wheeler issued a statement in response to Obama in which he expressed reservations about the proposal. “Title II brings with it policy issues that run the gamut from privacy to universal service to the ability of federal agencies to protect consumers, as well as legal issues ranging from the ability of Title II to cover mobile services to the concept of applying forbearance on services under Title II.”

Previous chairmen of the FCC have had similar fears about what Title II would do to the internet. In 1998, Bill Kennard, FCC Chairman appointed under Bill Clinton, testified before Congress that “classifying Internet access services as telecommunications services could have significant consequences for the global development of the Internet. We recognize the unique qualities of the Internet, and do not presume that legacy regulatory frameworks are appropriately applied to it.”

When the head of a regulatory agency shows concerns about regulatory overreach, we should all take notice. Despite what the president is demanding, Title II regulation would result in higher prices for consumers, and the FCC knows it.