New FCC rules will kick at least 4.7 million households offline

This month, the FCC is set to issue an order that will reclassify broadband under Title II of the Communications Act. As a result of this reclassification, broadband will suddenly become subject to numerous federal and local taxes and fees.

How much will these new taxes reduce broadband subscribership? Nobody knows for sure, but using the existing economic literature we can come up with a back-of-the-envelope calculation.

According to a policy brief by Brookings’s Bob Litan and the Progressive Policy Institute’s Hal Singer, reclassification under Title II will increase fixed broadband costs on average by $67 per year due to both federal and local taxes. With pre-Title II costs of broadband at $537 per year, this represents a 12.4 percent increase.

[I have updated these estimates at the end of this post.]

How much will this 12.4 percent increase in broadband costs reduce the number of broadband subscriptions demanded? For that, we must turn to the literature on the elasticity of demand for broadband.

As is often the case, the literature on this subject does not give one clear answer. For example, Austan Goolsbee, who was chairman of President Obama’s Council of Economic Advisors in 2010 and 2011, estimated in 2006 that broadband elasticity ranged from -2.15 to -3.76, with an average of around -2.75.

A 2014 study by two FCC economists and their coauthors estimates the elasticity of demand for marginal non-subscribers. That is, they use survey data of people who are not currently broadband subscribers, exclude the 2/3 of respondents who say they would not buy broadband at any price, and estimate their demand elasticity at -0.62.

Since the literature doesn’t settle the matter, let’s pick the more conservative number and use it as a lower bound.

With 84 million fixed broadband subscribers facing a 12.4 percent increase in prices, with an elasticity of -0.62, there will be a 7.7 percent reduction in broadband subscribers, or a decline of 6.45 million households.

Obviously, this is a terrible result.

A question for my friends in the tech policy world who support reclassification: How many households do you think will lose broadband access due to new taxes and fees? Please show your work.

UPDATE: Looks like I missed this updated post from Singer and Litan, which notes that due to the extension of the Internet Tax Freedom Act, the total amount of new taxes from reclassification will be only about $49/year, not $67/year as stated above.

This represents a 9.1 percent increase in costs, so the number of households with broadband will decline by only 5.6 percent, or 4.7 million.

While I regret the oversight, this is still a very high number that deserves attention.

Eli Dourado is a research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program. Follow @elidourado on Twitter.