How tax reform can support rural broadband

Not all U.S. communities are created equal when it comes to broadband deployment and availability. Earlier this year, my colleagues Blair Levin and Carol Mattey shared the challenges associated with deploying broadband in rural areas. According to the authors, it is not only expensive, but it does not necessarily yield a profitable return for private companies.

The gap in high-speed broadband access between rural and urban areas remains wide in the U.S. According to the Federal Communications Commission, 39 percent of rural Americans (23.4 million) lack broadband access to a fixed service with speeds of 25 megabits per second (Mbps) download/3 Mbps upload, while only four percent of urban residents lack access to those speeds. Without access to high-speed broadband, rural residents are severely limited when it comes to economic development, civic engagement, and the other social benefits related to broadband availability and its adoption.

As the House GOP released the first draft of the tax plan last week, rural broadband deployment, an issue that continues to receive bipartisan congressional attention, may find some helpful incentives. For telecommunications companies that are highly capital-intensive, the draft that the Senate eventually adopts could impact investments in new rural broadband facilities or the upkeep of existing network infrastructure in rural and urban areas.

Private equity has led broadband deployment

USTelecom, which represents the nation’s wireline companies, reported that broadband industry capital expenditures for both wireline and wireless were approximately $1.6 trillion in network infrastructure between 1996 and 2016. Last week, the association also shared that the broadband industry has not been immune to the new regulations imposed by Title II, or the reclassification of broadband service providers as common carriers. Referencing the existing regulatory regime, the industry reportedly spent $76 billion on network infrastructure in 2016, representing a decline from $77.9 billion in 2015, and $78.4 billion in 2014.

Capital expenditures for the member companies of CTIA-The Wireless Association, which represents the nation’s mobile carriers, totaled $26.4 billion in 2016, and over $200 billion since 2009. CTIA has also separately taken credit for the purchase of spectrum licenses, whose sales have generated over $100 billion for the national treasury since 2009.

The cable industry, according to the data from NCTA – The Internet and Television Association, has also invested quite generously – over $250 billion in capital infrastructure since 2016.

While the proposed draft of the tax plan appears to be more of a short-term fix through the elimination of unnecessary burdens for individuals and corporations and lowered tax rates, the question of its impact on companies that rely on more debt, risk, and long-term returns remains unanswered. Given the uncertainty of private sector investments going forward, the final tax plan must also include incentives such as corporate interest deductions that will contribute to broadband growth, especially those incentives that lower the cost of borrowing and secure financial risks.

Broadband matters to the national economy

In 2013, an OECD report noted high fixed costs (capital expenditures), variable costs (operational expenditures), and direct expenses (pole attachments, trenching, and residential access) all contributed to costly broadband build outs. As indicated in the report, it has been the relationship between formerly regulated monopoly arrangements and the absence of competition that has historically contributed to fixed rates of returns for private companies.

Since President Trump has stated his goal of bringing high-speed broadband networks to rural communities, the pending tax reform plan should be evaluated against this and other national infrastructure projects. More industry-specific analysis should also be conducted to ensure positive business development and job growth for capital-intensive industries.

Tax reform must include proposals that spur industry investment

Two proposals that are mentioned in the draft tax plan are corporate interest deductions and full expensing, both of which should remain of high interest to lawmakers seeking to close the rural divide. And, one should not be considered a substitute for the other, given the high capital investment needs of rural deployment.

Currently, the interest deductibility rule allows businesses to deduct loan debt. New equipment purchases, and working capital that is used to cover bills, wages, and other expenses are also eligible deductions under the rule.

Many telecom companies borrow to invest in new markets or expand within existing ones. Thus, interest deductibility can incentivize companies to take on debt capital, especially in markets and investments where there is no immediate return. Debt for financing new facilities, operational expenses (e.g., pole attachments, digging), equipment, and working capital can support more rapid deployment of rural broadband. In the draft bill, the deduction of net interest would be limited to 30 percent of adjusted taxable income, regardless of business form, with the exception of small businesses.

While the House GOP has so far agreed on maintaining interest deductibility even with the thin cap, the Senate should follow suit. The revised expensing rules, which provide for 100 percent write-offs of new investments in depreciable assets, may also spur business development. But, they will primarily address what companies spend and not what they borrow. Thus, this recommendation alone may not necessarily prompt companies to invest more or take on new capital projects.

Moving forward, it’s important that policymakers consider both the immediate and longer-term needs of American businesses. More important, the alignment of the plan’s details with national infrastructure goals should become one of the priorities during the next round of debate. In the case of broadband deployment, these conversations should anticipate how to fund the access needs of rural America as part of a plan to return prosperity back to American communities.

CTIA and NCTA are donors to the Brookings Institution. The findings, interpretations, and conclusions posted in this piece are solely those of the authors and not influenced by any donation.