Why did the government impose a completely different funding mechanism on the Internet than on the Interstate Highway System? There is no substantive distinction between the shared use of local infrastructure by commercial “edge” providers on the Internet and shared use of the local infrastructure by commercial “edge” providers (e.g., FedEx) on the highways.
In Part 1 of this post, I described the history of government intervention in the funding of the Internet, which has been used to exempt commercial users from paying for the use of local Internet infrastructure. The most recent intervention, known as “net neutrality”, was ostensibly intended to protect consumers, but in practice, requires that consumers bear all the costs of maintaining and upgrading local Internet infrastructure while content and application providers pay nothing. This consumer-funded commercial subsidy model is the opposite of the approach the government took when funding the Interstate Highway System: The federal government makes commercial users pay more for their use of the highways than consumers. This fundamental difference in approach is why net neutrality advocates abandoned the “information superhighway” analogy promoted by the Clinton Administration during the 1990s.
The Interstate Highway System was authorized by the Federal Aid Highway Act of 1956, which created the Highway Trust Fund (HTF) to finance the new “superhighway.” The HTF is a user-supported fund that derives hypothecated tax revenues from excise taxes on motor fuels and heavy commercial vehicles, which are the primary source of revenue for federal-aid highways. When it was designing this funding mechanism, the government recognized that the additional congestion and road damage caused by the commercial trucking industry imposes additional costs on highway infrastructure. Although all users contribute to the HTF through fuel taxes, the commercial trucking industry pays higher excise taxes than consumer users. Diesel fuel, which is used primarily by the commercial trucking industry, is taxed at a higher rate than gasoline (diesel is taxed at 24.3 cents per gallon, gasoline is taxed at 18.3 cents per gallon). The HTF also receives revenues produced by excise taxes imposed exclusively on tires used for heavy vehicles, the retail sale of heavy highway vehicles (e.g., semi-trucks), and from the heavy vehicle use tax. These taxes are intended to “better reflect the cost responsibility of heavy trucks” for shared use of the highway infrastructure.
If the theory of the ESP exemption and the net neutrality payment exemption were applied to the highways, commercial users wouldn’t pay any hypothecated taxes for their use of the Interstate Highway System. In net neutrality terms, FedEx uses the highways to offer an “edge” service to consumers who ask FedEx to deliver packages to their home using a shared highway infrastructure that FedEx doesn’t own or operate. If the government treated FedEx the same way it treats “over the top” Internet companies, the government would eliminate taxes on diesel fuel and, rather than charge a heavy vehicle use tax, the government would provide a heavy vehicle use exemption. As a result, consumers would have to pay higher gasoline taxes to make up for the funding lost when shipping companies stopped paying hypothecated taxes (similar to the way telephone subscribers paid for the ESP exemption with their phone bills). The higher gasoline taxes would impact every consumer who uses the highways – even consumers who never use FedEx. Any suggestion that FedEx pay its fair share for use of the highways would be deemed a “plot to block highway freedom” by threatening the “commercial model” of the “open highways” (the terms used by FCC Chairman Julius Genachowski to describe any suggestion that would eliminate the net neutrality payment exemption in the Internet context).
Why did the government impose a completely different “commercial model” on the Internet than on the Interstate Highway System? There is no substantive distinction between the shared use of local infrastructure by commercial “edge” providers on the Internet and shared use of the local infrastructure by commercial “edge” providers (e.g., FedEx) on the highways. The difference in treatment is a historical anomaly resulting from the initially “temporary” ESP exemption that has morphed into a desire to permanently subsidize the profits of “over the top” Internet companies in order to “preserve” the historical payment models of the Internet. In its order adopting net neutrality rules, the FCC exempted “edge” providers from paying for their use of local Internet infrastructure because ISPs “may have incentives to increase revenues by charging edge providers,” which the FCC believed would reduce incentives for edge providers to invest by reducing “the potential profit that an edge provider would expect to earn from developing new offerings.” (Emphasis added.) Excise taxes also reduce the potential profits of FedEx and other users of heavy commercial vehicles on the highways, but the federal government has not exempted them from the ordinary costs of doing business to encourage investment in new shipping offerings. To the contrary, a brochure released by the Department of Transportation (DOT) asks, “What can be done to enhance [heavy vehicle use tax] revenues?” The DOT views the heavy use vehicle tax as a way to “level the playing field” for consumers “by ensuring that operators of heavy trucks pay a little more for the highway network.” Of course, the FCC says net neutrality, which exempts commercial users from paying anything for their use of the local Internet, creates a “level playing field” for consumers too.
In an economic system based on capitalism, companies are not routinely exempted from the ordinary costs of doing business, including the use of shared infrastructure. Though the Interstate Highway System is not a free market, the government has at least attempted to correlate usage and costs. When FedEx uses heavy vehicles to deliver packages, it pays more for its use of the highways than consumers, even when consumers have requested FedEx deliveries. This has the effect of reducing the potential profits of FedEx – the “harm” to “edge” providers the FCC relied on to justify the net neutrality payment exemption on the Internet – but it also has the effect of encouraging FedEx to innovate and invest in more efficient methods of package delivery that cause less congestion and harm to the highways.
The FCC took the opposite approach with net neutrality. Its rules are designed to maximize the profits of commercial “edge” providers on the Internet while reducing their incentives to use bandwidth more efficiently. As a result, Internet consumers who never watch a video on the Internet nevertheless share a portion of the cost of upgrading local Internet infrastructure to deliver high definition video while “over the top” Internet companies – no matter how large or successful they become – pay nothing. No wonder net neutrality advocates have stopped talking about the “information superhighway.” If policymakers were to examine the analogy too closely, they might realize that net neutrality isn’t intended to “level the playing field” for consumers – it’s intended to protect the profits of commercial “edge” providers at the expense of consumers.