Broadband penetration

April 28, 2004

PRESIDENT BUSH got it right this week in setting a national goal of universal broadband access to the Internet by 2007, but not in calling for permanently exempting Internet services from taxes. Continuation of a temporary ban for a few more years - a compromise proposed by Arizona Sen. John McCain - may be in order, but a permanent one is likely not necessary.

There's no question that expanding U.S. broadband penetration remains a critical need. The United States already has more high-speed Internet users than any other country, and a recent Pew survey found U.S. home broadband use grew by 60 percent in just the last year. But the majority of U.S. Internet users still employ pokey dial-up connections. And America lags - well behind South Korea, Japan and a half-dozen other nations - when it comes to its broadband penetration rate.

Much faster, always-on broadband hookups open new worlds of utility for consumers, workers and companies, already fueling productivity growth. Few disagree that expanding broadband is important to America's future global competitiveness. The question is how best to foster its spread and, particularly, its penetration into unserved areas or across the digital divide to low-income families.

The House already has approved making permanent a ban on taxing Internet access services that was allowed to expire last year, and the Senate is now taking it up. This debate has big financial consequences, but is somewhat misplaced in terms of nurturing high-speed Internet availability and use.

The Internet access tax ban has cut off states and localities from hundreds of millions of dollars annually in potential revenues. But this could quickly rise into the billions of dollars - including tax losses - once major telephone companies carry out plans to deliver now-taxed phone services via the Internet.

More to the point, Internet service taxes likely wouldn't deter greater broadband penetration: A University of Tennessee study found no difference in high-speed hookup rates - after the access tax prohibition came into effect in 1998 - between about 10 states specifically excluded from the ban and the many not allowed to tax.

The real obstacle to expanding broadband has been a lack of infrastructure investment by entrenched telecommunication firms wedded to their current networks. A promising end-run is the emerging technology of delivering affordable high-speed Internet via power lines; Cinergy, a big Midwestern utility, already is doing that. Tax plans to spur such new investments in competition ought to be the focus right now, not a permanent Internet service tax ban.

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