Here are notes from yesterday’s Minnesota Broadband Task Force. The quick recap – in the morning they heard from Dr. Raul Katz on a study he did on the impact of sales tax on telecom equipment and future investment in local telecom infrastructure. The study was funded by industry folks, All Minnesota Broadband Alliance. The study concludes that the sales tax will hinder investment. Task Force member Dan Richter has a very interesting perspective on sale tax – that it supports all sort of infrastructure and that tax does not have a huge implication on his investment.
The Task Force report has been garnering attention from lots of places. Most folks are very interested in the potential $100 million for broadband development. Hearing from the government liaison from DEED, it didn’t seem as if the $100 million was very likely for this year (with the unsession) but that even if it wasn’t that didn’t indicate a lack of interest on the Governor’s part.
During the afternoon the Task Force met in small groups.
11:00-11:15 Welcome/Introductions/Public Comments/Approve minutes from January 9, 2014
There was a press conference with All Minnesota Broadband Alliance (industry folks including MHTA) on the latest report on the impact of telecom equipment sales tax.
For the first time wireless, telecom & cable have come together to look at impact on sales tax on capital investment. In November the governor came out saying we should look at repealing tax. So we got a report in the impact of the sales tax. Over 30 legislative members have expressed need for repeal or introduces legislation on repealing tax.
11:15-11:30 Update from Danna MacKenzie, Office of Broadband Development
It’s been six weeks since Danna started.
There is a large list of charges for the office so we’re focusing on:
Achieving state’s goal of border to border broadband
Be a national leaders in adoption and use of broadband
1. Infrastructure – what are the unmet needs? What are federal resources that can help? See how we can help.
2. Adoption and inclusion – we are developing a statewide strategy. We’ve been talking with providers and nonprofits. We’re planning a brainstorming session in March.
3. Identifying opportunities for culture change within the State.
4. Engagement – getting help and meeting with groups and hopefully new voices to get new energy around closing the gaps
Created an inventory of active projects in the state with contact info
We have maps of those areas.
Creating a one-pager of federal opportunities with deadlines
Tracking broadband legislation
Developing broader strategy for 2014 work plan
Reaching out to peers in other states. Unfortunately some are closing at the end of the year or soon after.
Went to DC with national partner. Klobuchar was very interested in Task Force. Franken was interested too. Might be an opportunity to track back with them and form partnerships.
There has been interest in the report – people are most interested in the $100 million fund. People want to know what that means.
ON THE BLANDIN CONFERENCE
There were 25 partners hosting the event.
Access & utilization is reaching a tipping point. We had folks from all over the state at regional, county and city level. Nice focus on business development. Senator Schmit and Greater MN Partnership spoke about the listening tour. Very compelling panel of people from the front lines – one observation from panelist – broadband access is the number one is that main street businesses say they need.
The SNG report = a white paper commissioned by Blandin. A nice analysis on impact of investment on broadband from an economic perspective. Looks at what it would cost to help businesses (et al) increase sophistication of use. And what ROI would be. The have demonstrated a 10 to 1 ROI.
Blandin hopes that report will be used as a tool in legislature.
11:30-11:45 Legislative Session Preview—Kim Babine, DEED
What we see the legislature and governor’s office doing this session. (Not firm)
We’re looking forward to February forecast as great reference point when others talk about broadband (such as Rep Johnson & Senator Schmit)
conversations that are happening:
o Infrastructure fund
o What happens with office
o What happens with municipal networks
We meet with legislators. One legislator was very engaged. Things were happening in the county and it was helpful to have the OBD suggest they get federal funding
As we continue conversation we see that the governor is interested in the work. He is looking at everything this un-session. We want to make things easier. He is asking about what can happen in 2015. We are working through those.
The governor will come out with a budget – but that’s not necessarily where he sits with broadband. It seems like a discussion on an infrastructure fund needs to happen before funding is allocating.
MAK remark: But we have a 2015 deadline. Broadband is a backbone technology to help government work better. There are counties without gov records online. We could see cost savings with better broadband. And that fits into the un-session.
11:45-12:30 Presentation by Dr. Raul Katz of the Broadband Tax Institute on the Minnesota specific tax study
There was a heated discussion on this last time so we thought it would be helpful to take a deeper look into the issue of the sales tax issue.
On the one hand taxes are revenue for the state; the other hand, they may hinder investment. We try to balance the pro and con to see if in the long run taxes are an economic benefit or hindrance to the community.
EXECUTIVE SUMMARY FROM THE REPORT
The telecom industry has made substantial investments in Minnesota in recent years. Between 2006 and 2012, total investment amounted to $5.167 billion (or $835.65 per capita). In the last four years alone (2010-2013) telecommunication companies invested $2.994 billion. Of this sum, 56.3 percent were directly dedicated to the deployment of broadband services, while approximately 50 percent were invested in the suburban, rural and isolated communities.
This investment has contributed to the support of the 112,239 jobs/year and the generation of $10.386 billion in output. In the context of an initially recovering state economy, which continues to exhibit a significant duality between urban and rural setting, any policy initiative that has a potential to reduce the rate of telecommunications investment could have determinate effects of repealing the sales tax exemption on telecommunications equipment purchasing, as enacted in 2013.
Based on a econometric analysis of US data, each percentage point increase in the sales tax rate on telecommunications equipment decreases cable TV investment by $.46 per capita and telecommunications investment by $.93 per capita across all states. Minnesota’s effective tax rate for telecommunications equipment in 2014 would jump from zero to 7.66 percent. As such, the econometric analysis shows that the repeal of the sales tax exemption would trigger a decrease in cable TV investment of $3.51 per capita (equivalent to 11.77 percent under the current level of $29.82) and a decrease in telecommunications investment of $7.15 per capita (6.57 percent less than the current level of $108.72). IN total, the decrease in investment would amount to $57 million (or a 8.53 percent decrease of a planned 2013 investment base of $668.61 million) the first year of impact and $96 million in the second year due to the inertia effect that characterized telecommunications equipment spending. As a result, the imposition of sales taxes produces not only a short-term but also a long-term effect on investment levels. Base on this decrease, it is estimated that over four years, total revenues to be generated to the state treasury would reach approximately $113.37 million.
More importantly, given the short term multiplying impact that results from network deployment, a $153 million reduction in spending for these initial two years would trigger a decrease of 3,323 jobs and $308 million in GDP. Beyond this direct effect, econometric modeling indicates that eliminating the sales and use tax exemption on telecommunications infrastructure would – in just two years – reduce the economic activity by $722 million.
TO provide additional evidence of the negative effects of the repeal of the sales tax exemption, a survey conducted across telecommunications companies operating in the state (which generated 39 responses) indicated that, under the current tax policy at least 40 percent of service providers would reduce their investment in 2014. Alternatively, at least 50 percent of service providers would either marginally or substantially increase their CAPEX if the exemption were to be extended and/or expanded.
In sum, the repeal of the sales and tax exemption of “telecommunication” capital equipment is detrimental to the economy of Minnesota. Consistent with the recommendations of the Governor’s Task Force, the repeals should be reconsidered (and the exemption should be potentially extended to other investment categories) to allow telecommunications service providers to continue playing a critical role in the economic growth of the state.
QUESTIONS ET AL
This is be amplified in a donut pattern. The center of the donut will not suffer as much as the outer rings. And certain sectors will be impacted more: wholesale trade, health care, some services. Because (for example) health care sets up remote access to support rural areas; broadband allows remote access to be more effective.
Why cable impacted more?
Cable is more built out. Wireless is still expanding. With tax exemption would account for some.
Going from DSL to FTTH is more expensive than upgrading DOCSIS.
Providers indicate that while they might not reduce their investment in infrastructure, but they will shift it to states that have more business-friendly tax policies.
All of the analysis is based on infrastructure.
About to write a book on stimulating demand. We have a demand gap. 30 percent of people who could get broadband don’t. affordability is an issue as are digital literacy and content.
The government has a role to play in education, health care services, subsidies…
Building demand is not as easy is building infrastructure.
focused community efforts help. People don’t know what they don’t know.
In Germany there’s an intergenerational program to increase adoption. Kids can be the change agent in a household.
Why count jobs year over year? Someone who keeps their job is counting as a new job year one and two.
It’s growth accounting.
If you were the director of the OBD and you had a modest budget how would you best use that?
Market failure is a situation when business can’t cover a community. IN technology, we see it less and less. The private sector has filled that need. But we could use better adoption with residents and small businesses and micro-enterprises.
On ND sales tax rate example. YOU showed a boon in investment after sales tax was dropped but the timing coincides with oil boon. Did you factor in such external factors?
NO it wasn’t
How did you arrive at the tax number used in the investement tool? Does sales tax lessen the amount in investment?
Yes. Research shows that taxes reduce investment. There’s a lot of research on it.
From Dan Richter:
From a telecom/fixed wireless perspective. We self report on central office et al investments; we pay taxes. We understand that taxes pays for bridges and other infrastructure. When bridges fall into the river that impacts business too. I have a hard time believing that phone companies are really held up by sales tax. They are focused on ROI and jobs. We got ARRA money – it was a wonderful help. Some things do need to sunset – and maybe the sales tax exemption is one of those things. We don’t base growth and investment on sales tax rates.
Many areas are served by multiple providers. So broadband isn’t a utility.
MAK: I don’t think that’s a question for Dr Katz. This is the only place where capital equipment is taxed. And that money is not going to roads and bridges. We’re not going to take a vote. This is an informational session.
I understand the formula – how did you get to the donut effect? Any business for profit starts with most profitable areas. But isn’t this more like a trickle down?
It goes back to sector analysis. Big metros are where the money is – but some business are moving out of metro areas for economic reasons and broadband is allowing them to relocate. Broadband is an enabler for the donut effect.
Either technology kills jobs and technology creates jobs. But it depends on which jobs you are focusing on.
Please say more about other factors (aside from taxes) that influence investment and business decisions.
So we’re looking at FTTH
Key choke point – population density, share of business, cost of capital equipment, cost of facilities
Then you do the cashflow equation. Sales tax is another choke point.
From the policy perspective – How do I get the private sector to contribute?
Task Force 2014 Work Plan
Topics to address in 2014
• Precision Ag
• Cybersecurity (role of higher ed)
o Could be part of digital inclusion
o Could be part of advanced topics
• Advanced and Gigabit network
• eRate reform
• applications up/download speed requirements
• Mobile broadband availability & use
o How to effectively subsidize
• State speed goal
• Connect America Fund – give the TF an overview and opps for MN companies
• ConnectED program
• Structure of stakeholder input
o This is the last year of the Task Force? We serve until the Governor decides. Theoretically, if the governor wins we could continue. If there’s a new governor, we will be done. We looked at the need for an ongoing entity – for a group to bridge potential change in governor. Maybe we think about longevity.
Review of work group structure and goals
One idea is to reduce number of groups and have everyone be on at least one group
Be more deliberate for spending time in small groups
Last time one sub-group seemed to take the lead on recommendations – can we spread that out more?
Maybe we need actual homework
1. Digital Literacy
3. Mobile apps
4. Advanced networks
• Digital literacy/adoption
• Infrastructure – inclduing access and affordability
• Advanced networks/apps
There was a lot of discussion on cybersecurity. Is it a digital inclusion issue, is it advanced network? It will be hot topic here and on a broader level.
Subgroups will make policy recommendations and could suggestion topics for OBD white papers.
Notes from infrastructure
What does it take to build out? Policy-wise how do you encourage that?
How do you make it universally affordable?
Cost to get it there versus cost to recoup?
Do we want to look at new goals?
Firs comes ubiquity, then speed?
Cybersecurity includes physical access to network.
In wireless you have a monopoly because of the spectrum auctions. Also somewhat that way with wired carriers in much of the state. How do you encourage competition?
We need to look at future needs. DSL doesn’t get there. And we need to look at average household and average household needs.
Maybe we could work with providers to see what they project for customer use.
What drives cost:
Permitting process and middle mile. Wireless needs fiber middle mile. Are there ways to streamline the process?
We could look at what other states have done.
If the state is serious about reaching goals – they could get an application to test the speed throughout the state.
Broadband is the only thing we buy at “up to” speeds. You wouldn’t buy up to a gallon of gas. Maybe we can work on policy that focused on advertising minimum speeds – not up to speeds.
Recommended white papers:
How about one-pages?
Affordability – universal access, low income affordability, small business affordability. Not a fan of temporary fixes. There are existing sources – such as Connect America Fund.
RECAP OF SMALL GROUPS
Advanced Network Sub Group Notes:
• Precision Ag
• Models for funding advanced networks
• What does an enabling regulatory enviroment look like
• Look at apps by sectors – such as public safety
• Cybersecurity – what is the role of the State? And what should it be?
• 511 building – what are the gateway points for backbone access in MN
• As we learn more we may suggest more
• What are advanced networks?
Infrastructure Sub Group Notes:
What will it take to build out?
What about the goal? Need to make sure infrastructure meet future demand
What are other states doing
State policies on physical security
Promote residents testing speeds
White papers: maybe we need one-page topics such as cybersecurity, affordability?
Digital Literacy Sub Group Notes:
Erate reform – how would that apply?
Can we keep school labs open at night?
Update speed/applications charts
obligation of government to assure equitable access?
increasing demand – what can you do with more? Identify trainers to teach next level of use
Get a starter package for folks to get online to test it out.
If we want providers to invest we need to create the demand.
2014 work plan
Housekeeping (use of videoconferencing, etc.)