Bridge Span 19-1: Finish Franchise Fee Fudging

In the early 1990s cable television began to reach more households and become a true alternative to broadcast. Seemingly overnight, the four-channel world became a universe of 400 channels. Consumers were benefitting for the massive growth in cable and the subsequent explosion in competitive video options and alternatives for consumers.

At the same time local communities were layering on rules, requests and regulations. Congress, not to be outdone, stepped in with the Cable Act to regulate from the federal perspective. The federal law allowed local communities to continue regulating television by awarding “franchises” to local cable television operators, but a cap was placed on franchise fees. Under the federal law these could be up to five percent of the operator’s cable television service revenues. The result was economic boom for municipalities around the country, delivering over $3 billion a year in new revenues. The five percent cap provided predictability and ensured that cable television operators paid a fair, not excessive, tax that more than covering any costs associated with their operations.

But over time a handful of communities ignored the intent of the law and have tried to find new ways to circumvent the franchise fee cap to boost their municipal coffers. In some localities this has meant attempting to extract franchise fees from other services that flow over cable infrastructure, such as broadband internet access. This is merely a form of backdoor double taxation that the Cable Act clearly does not allow. Congress has repeatedly and clearly stated a strong federal policy banning any local taxes on the internet in order to encourage deployment and development of faster and farther-reaching broadband, something a new internet access tax would completely undercut.

Other communities have demanded “in kind” donations of valuable goods and services as a condition of awarding a cable television franchise, something that also clearly breaks the cap. Taxes are still taxes whether they are exacted in cash or “in kind” contributions with the exact same economic value.

Local franchise authorities are of course free to request or demand “in kind” services such as television service for municipal buildings or wi-fi hotspots in a public park, but the value of those contributions must count against the five percent cable television franchise fee cap. If not, the cap becomes completely meaningless something Congress never intended and would not accept.

The franchise fee cap end around schemes are bad for cable operators, but they are even worse for customers who end up footing the bill for spiraling taxes on cable television and broadband. Already franchise fees including the “in kind” component are nearly double the statutory cap, and the longer it goes unaddressed the worse the problem will become.

The FCC’s current Section 621 proceeding provides a valuable opportunity to re-affirm the basic logic of the Cable Act, and to put an end to these outrageous local efforts to skirt the law that undermine the basic tradeoff that has seen cable television and consumer choice skyrocket. The FCC has the opportunity to stand up for consumers and stop a practice that threatens to spike cable television and internet bills.

The FCC has the opportunity to restore and honor the Congressionally crafted a solution that has withstood time because that solution was bipartisan and imbued with the notion that the marketplace can best address market challenges. Consumers should look forward to FCC action when they again will protected from overzealous local tax raisers.

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