Mixed messages on broadband

Minnesota’s new business taxes have been panned by economists, business leaders, taxpayer advocates, and even the governor who signed the taxes into law. However, while the sales tax on warehousing and business equipment repairs have garnered much of the attention, the new “telecom tax” seemed to attract less scrutiny than it deserves. That may be changing.

Last year, the legislature repealed a sales tax exemption on telecommunications capital equipment, essentially discouraging and penalizing private investment in broadband networks. Not only is this bad policy, it is also contrary to the recommendations of the governor’s own broadband task force and hamstrings the state’s goal of universal high-speed broadband access.

The state will pay a heavy price if the broadband tax remains.

A new study finds that telecommunications investment in Minnesota would plummet by $153 million over the course of just two years unless the sales tax exemption is reinstated. Dr. Raul Katz, one of the study’s authors, wrote in the Star Tribune: “The economic analysis I conducted also showed that the new tax on communications infrastructure will destroy more than $722 million in additional economic activity over the next few years. While the projected revenue to the state from this tax is not insignificant, the negative economic impact is seven times greater than the projected revenue. Further, communities in rural areas will suffer the most.”

Simply stated, the most effective way to spur broadband investment and expand broadband access in rural Minnesota is to reinstate the sales tax exemption on telecommunications capital equipment. Governor Dayton has apparently gotten the message, as he now supports reinstating the exemption and undoing the other business-to-business taxes from 2013.

Yet even as (some) progress is being made on the broadband front, some legislators are pursuing policies that would undermine private investment and innovation.

For example, HF 2600 (and SF 2225) would eliminate the referendum requirement for municipal broadband networks, allow for the creation of “broadband service districts” which would have taxing authority, and dramatically expands the scope and powers of the new Office of Broadband Development, which in itself is arguably a redundant agency. Other bills introduced this session would create a $100 million matching grant fund to promote broadband access in “underserved areas.” (Of course, taxpayers were also promised that broadband funds from the 2009 federal stimulus package would only go to underserved areas, a dubious promise at best.)

If this is really the year of streamlining government, cutting middle class taxes, and reducing bureaucratic complexity, the legislature is off to a rough start.

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