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One may usually assume the State of Alabama and Chicago have little in common politically, but government officials in both places have put forward plans to tax Netflix and other streaming digital services.
Although Chicago’s “Netflix tax” is already in effect, the Alabama tax agency’s proposal is being debated by state lawmakers.
The Alabama Department of Revenue is proposing a new regulation to redefine the state’s excise tax on videocassette rentals to cover any medium conveying entertainment content “perceptible to the senses,” including digital streaming services such as Amazon Prime, Hulu, and Netflix.
Chicago started collecting a 9 percent excise tax on “electronically delivered amusements” in July, making residents’ Netflix bills more expensive.
Both proposals are bad tax policy, hindering innovation and restricting consumer choice in the hopes of grabbing more cash for government coffers.
As economics writers Hance Haney and George Gilder write in Ten Principles of Telecom Policy, “The first thing elected officials should consider doing to encourage investment in telecom services is repeal discriminatory taxes and fees on telecom services.”
Taxing “electronically delivered amusements” is necessarily a tax discriminating against Netflix and other online-streaming services, because traditional cable companies don’t have to pay it.
By taxing the alternatives to established players in the business of delivering entertainment to people’s television screens, governments are wielding tax policy as a weapon to discourage people from “cutting the cord.”
The cable, satellite, and broadcast companies would certainly like to see these new and highly successful competitors quashed. In 2004, Blockbuster Video employed 60,000 people and had more than 9,000 stores worldwide. Ten years later, it closed its doors for the last time, having failed to capitalize on the rise of new technologies and improve the quality of its service.
In fact, the company’s unfriendly customer service policies helped bring on the rise of Blockbuster Video’s successor in the entertainment-delivery business, Netflix.
By adding a tax on electrons running through optic fiber that are converted into episodes of Daredevil or reruns of Bob’s Burgers, governments will kill the next Netflix before it even gets started, by increasing costs to consumers.
In addition to discouraging innovation in the entertainment-delivery industry, these laws force taxpayers to send governments more of their money for no good reason.
Over time, driving on a physical highway causes deterioration, requiring taxes or user fees to offset and pay for the road’s use. Netflix and other online video providers, by contrast, don’t place any kind of wear and tear on the “information superhighway” the way driving on a physical road causes the roadway to deteriorate. Thus neither Chicago’s “electronically delivered amusements” tax nor the Alabama Department of Revenue’s proposed tax on entertainment “perceptible to the senses” remedies any real problem other than those governments’ insatiable desire for money.
Discriminatory telecom taxes are dusty old ideas born decades ago when government-created monopolies left consumers no alternative but to accept the providers’ poor quality and service. Today, consumers have more options for access to the entertainment and informational content they want, thanks to technological innovations, and these innovations don’t increase the cost of government services.
Lawmakers—not only in Alabama and Chicago, but across the nation and at all levels of government—should be working to encourage more competition between established and new players in the content-delivery industry, not taxing success and rewarding failure.
When taxes and regulation are kept low, the consumer wins regardless of who succeeds in the competition for their dollars, creating a win-win situation for both consumers and businesses.