Bridge Span 19-3: Time for the FCC to End the Franchise Tax End-Around

Tomorrow the FCC will hold a vote on the legal limits of the power of states and localities to impose fees on cable operators and to regulate non-cable services. The need for a new vote to affirm the limitations is because recently some localities have chosen to “reimagine” the law first formed in the 1990s when Congress stepped in to regulate cable television.

A deal was struck in Congress years ago that allowed local communities to continue regulating television by awarding “franchises” to local cable television operators but a cap was placed on the amount that a locality could charge for the franchise. Currently that cap is set at five percent of the operator’s cable television service revenues.  This has been an economic boom for municipalities around the country, delivering over $3 billion a year in new revenues.  The five percent cap has provided predictability and, from the localities point of view, ensured that cable television operators paid a tax that more than covers any costs associated with their operations.

But a great deal is not enough for some. Over the years, a handful of communities have ignored the intent of the law and sought 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 means they have moved to tax anything that flows through the lines, not just video. They also do so in direct defiance of federal law.

Other communities have demanded “in kind” donations of valuable goods and services as a condition of awarding a cable television franchise, increasing the total “tax” paid by the providers above the five percent cap. This is something that also clearly breaks the Congressional agreement. While appearing to be something of a shakedown, those engaged in such behavior try to explain it away by saying that demanding gifts in return for access is not the same as a tax or fee. Such rationalizing would be laughable but for the negative direct effect on consumers. Taxes are still taxes whether they are exacted in cash or “in kind” contributions with the exact same economic value.

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, putting 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 vote would simply count in-kind contributions required by the local franchise authority to be counted toward the cap, prohibit the localities from using their video franchise to regulate non-cable services, and end any fees or charges that exceed the cap.

The FCC has the opportunity to stand up for consumers and stop a practice that threatens to spike cable television and internet bills. Here is the opportunity to restore and honor the Congressionally crafted a solution that has withstood time, not least because the 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 be protected from overzealous local tax raisers trying to end run the system.

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