Commentary by Paul Jacobs, Palisades Hudson Financial
States and cities across the country have begun to notice that their residents spend a lot of money on internet streaming services – and to pass laws that ensure that spending results in tax revenue.
Iowa, Colorado, Maine, Wisconsin and other states impose sales tax on streaming services, setting their residents up with what an enterprising U.S. News & World Report headline writer called “Netflix and Bill.” More states and municipalities are in the process of considering such moves. But my home state of Georgia considered using its proposed “Netflix tax” for something much more specific. In doing so, it took a wrong turn in pursuit of a worthwhile goal.
Georgia’s Gov. Brian Kemp took office in January, and one of his stated goals was to expand internet access among the state’s many rural communities. Like many parts of the country, much of rural Georgia lacks high-speed internet, since telecommunications companies often see insufficient potential revenue in communities that are sparsely populated. Kemp’s goal is worthy enough, but the question of how state subsidies would be funded left many city-dwellers like me skeptical.
The Georgia General Assembly introduced House Bill 887 in early February. The bill proposed imposing sales tax on customers of streaming video services like Netflix, as well as customers who purchase digital music and e-books. In addition, all phone and TV services would be subject to a new communications tax. The tax revenue, which would mostly be collected from urban areas, would then be used to subsidize construction of internet lines in rural parts of the state.
Kemp is not wrong that expanding internet access is important. Rural Georgians should not be stuck without usable internet due to prohibitively expensive infrastructure costs, any more than they should be denied access to phone or postal service. According to the state Department of Community Affairs, approximately 1.6 million Georgians currently live in areas without high-speed internet access, and the state’s Rural Development Council recommended that expanding rural access should be a high priority in their December report. Lack of access is not only deeply frustrating for individual state residents, but a major hindrance to economic activity in areas where broadband is not available. The question is not, however, whether it is a good idea to get more Georgians online; the question is how to decide fairly who bears the cost of getting broadband to them.
Part of the problem is that legislators are not sure how much money they need to raise. Georgia House Ways & Means Committee Chairman Jay Powell told The Atlanta Journal-Constitution that the costs of the broadband expansion program will be researched this year as part of the legislative process. The question is further complicated by the reality that high-speed internet may be delivered in a variety of ways. The most cost-effective solutions will vary depending on geography and population density, among other factors. But regardless of the precise dollar amount required, slapping a tax specifically on existing high-speed internet users does not seem a fair way to proceed.
I was evidently not alone in my skepticism of this plan: About 65 percent of Georgians opposed taxing streaming services to pay for expanded broadband infrastructure, according to an AJC poll. Just a few weeks after Bill 887 was introduced, Georgia lawmakers responded to pushback by removing Netflix and other video streaming services from their proposal. (People who buy e-books and the handful of people who still pay for individual MP3s, however, will now face sales tax equivalent to what they would pay when buying books or music in physical form.) The revised legislation will still impose a 4 percent tax on a variety of online products, including video games. However, by removing the tax on streaming services without adding anything else, legislators say the new legislation won’t generate enough money to subsidize internet lines in rural communities, thus defeating the main purpose of the original proposal.
The problem with Georgia’s approach, as opposed to the way other states and cities are taxing streaming services, is that it specifically targets the largely urban and suburban subscriber bases of those services to raise revenue for rural infrastructure. More or less by definition, rural Georgians who lack broadband cannot benefit from subscriptions to such services. However, the other targets of the bill – downloadable files, as well as phone and TV services – are spread more evenly among Georgia residents.
Just because the “Netflix tax” was a bad idea does not mean we should abandon the idea of funding rural internet infrastructure entirely. Rather than lean most heavily on those Georgians who already use the internet most, we could instead evenly distribute the burden through a slight income or sales tax increase. This would mean that urban and rural Georgians alike would share the cost of expanding broadband access. If securing internet for rural Georgians is truly crucial, spread the load among all state residents, rather than blocking innovation or targeting a particular industry.
As for taxing online entertainment, I do not particularly object to the idea. A fairer approach, however, would be to tax all entertainment equally regardless of how it is delivered to customers, and to treat the results as part of the state’s general tax revenue. Lawmakers can then appropriate it for projects they think worthwhile, potentially including infrastructure initiatives. Doing this would remove the impression that legislators are attempting to rob the broadband-rich and give to the broadband-poor.
Unfortunately, widely raising taxes is never popular. Kemp has expressed his reluctance to do so, even before lawmakers tried and failed to get the Netflix tax through. And he is the Republican governor of a Southern state with a Republican-controlled legislature, which means that tax increases are even less popular than in other parts of the country. But if Kemp wants to expand technological infrastructure, the money has to come from somewhere. The idea is not inherently a bad one; I would simply rather all Georgians pay their fair share.