Communications and Society Program

Taxes and Rents on Telecommunications Imposed by Local Governments

Taxes and Rents on Telecommunications Imposed by Local Governments

The topic of charges assessed by local government upon telecommunications firms generated intense discussion, especially within the working group originally charged with the task of considering the impacts of local regulation on investment. The group contributed a detailed report of its deliberations. Many of its specific points were never discussed in plenary session, nor did the working group reach internal consensus. However, this section draws heavily upon elements of the working group's draft. The working group did come close to consensus about whether locally imposed charges do in fact create barriers to investment, with almost all agreeing they do. The working group also agreed that local charges can be imposed in ways that distort investment in telecommunications. Some did argue that taxes and rents do not constitute a demonstrable burden on investment-witness the substantial continuing new facilities expenditures by cable firms and CLECs in many markets. All assented to the proposition that local charges should be competitively neutral and should not, for example, favor cable operators over incumbent telecommunications providers or favor incumbents over competitors where the different entities engage in the same activities.

The working group provided some much needed definitional clarification. It suggested that the term fees refers to charges imposed to recover government costs of providing a service or regulating an activity. To be considered a fee, revenues generated thereby can be used only to recover government costs. On the other hand, the term rents refers to charges imposed in exchange for the right to occupy public property. These charges reflect the value to industry users of property owned by local governments on behalf of local taxpayers. The term taxes then covers charges imposed without any necessary relationship to any service provided or privilege granted by the local government.

There seemed wide agreement within the working group and at the larger conference that state and local governments can and should be able to recover the actual costs imposed upon them by the operation of telecommunications facilities. Cost recovery comes by definition through imposition of local fees, where these charges are designed only to recoup incremental costs created by the installation of telecommunications facilities. Fees cover both short and long term costs related to maintenance of the public rights-of-way. As to taxes, the group agreed that telecommunications businesses should be taxed in a comparable manner and at comparable rates to other businesses. This means there should be no special taxes levied upon telecommunications entities that are not assessed upon other business firms.

Rents provoked the most contention. Consensus broke down along predictable lines. Representatives of the government perspective usually defended the right of municipalities to charge rents. Firestone of The Aspen Institute pointed out that cities actually have conflicting interests. On the one hand, they are often strapped financially and must maintain or expand revenue levels. Especially attractive are those sources like telecommunications rents that are typically far less politically visible and volatile than local sales, income, or property taxes. On the other hand, cities very much desire investment in their area's telecommunications infrastructure and the concomitant benefits to their local economies and constituents. Proponents of the cities' rights to charge rents argued that local taxpayers are entitled to receive a return on their investment when firms use the public streets to generate private profit. Moreover, they maintained, governments are not the only providers of rights-of-way. Using public rights-of-way reduces the transaction costs that would be involved in negotiating to obtain rights-of-way from multiple private property owners. And as Firestone suggested, local officials have a built-in reason to avoid excessive rental charges: angry constituents' complaints if services available to other communities cannot be provided within their jurisdiction.

Most taking the firms' vantage disputed the right or desirability of governments charging rents. They observed that rents discourage precisely the deployment of new telecommunications facilities and services that should be everyone's goal. They also asserted that, as monopoly providers of access to streets, local governments can extract excess levels of payment.

Notwithstanding the wide gulf between these positions, most of the working group agreed that if rents are charged for the right to occupy public rights-of-way, comparable occupancies should be charged at comparable rates for all telecommunication providers, including cable television operators. The devilish details of implementing comparability received only brief attention. For example, "occupancy" can be ambiguous, say if a company changes from its initial menu of services or technologies to a new mix over time. Neither this element nor others were resolved. Working group members agreed that rents could be capped, though again unsurprisingly the level of the ceiling aroused debate. Some argued that Congress agreed in the Cable Act of 1984 on the fairness of cities charging 5 percent of gross revenues, a level legislators knew exceeded actual city costs. Others argued that rents should be capped at a much lower level, such as 1 or 2 percent of gross revenues.

Two additional important matters came up regarding inequality in rents which may discourage efficient investment. One is whether non-facilities-based carriers such as resellers and wireless should, in the interest of equity, be required to pay any rents that a government imposes. The other is how to deal with situations in which ILECs don't pay rent while potential and actual CLECs do. On the first, there seemed general agreement that wireless providers should pay rents only to the extent they do use rights-of-way (for instance, in operating antennas). Resellers would more or less automatically pay rents embedded in the payments they make to the facilities-based carriers on whom they rely.

As for how to resolve apparent inequities between rents charged the ILECs and those charged other facility operators, the working group identified two alternatives for moving toward competitively neutral rental charges:

  • Requiring local governments to provide access to rights-of-way free or at low cost to all providers; or,
  • Requiring providers who benefit from low- or no-cost right-of-way access to ncrease compensation to levels commensurate with other providers.

The working group recognized that local governments and beneficiaries of low-cost access are likely to litigate disputes arising from either alternative for years. State law issues and constitutional claims may put these disputes beyond the reach of the FCC. As a result, the group suggested that a political compromise may be a more expeditious way to eliminate the inequities in rental charges which distort investment decisions.

Most of the group concurred that preempting local authority may not be the best way to resolve the problem of inequitable rents. Frank Fisher, a professor of public policy at the University of Texas at Austin, argued with particular force that municipalities' control over this matter should not be breached, absent a showing that they have abused their authority. In his view, determining rents or taxes on local carriers should remain the province of local governments. On the other hand, some argued that cities have sometimes imposed unjustifiable charges. For example, Turetsky of Teligent said that some localities seek rents from his firm, even though its facilities are wireless and do not impact rights-of-way. The clash over local governments' taxing authority spawned the idea of having industry representatives and local government groups meet to develop a mutually acceptable solution. Michael Guido, mayor of Dearborn, Michigan, and telecommunications committee chair for the U.S. Conference of Mayors, said that the discussions at the conference left him optimistic about achieving such an entente.

Send comments or questions to tricia.kelly@aspeninst.org