FCC backs off Internet tax plan

The FCC has now formerly abandoned a proposal from earlier this year to increase funding for broadband Internet access support by placing a tax on that same broadband service.
  The roots of this issue originate with the Universal Service Fund (USF), and a move by the FCC to shift funds from the USF to help subsidize broadband internet access.  Funds for the USF come from a monthly service charge (tax) on landline and wireless phone services, and was initially designed to help provide affordable basic phone service throughout the nation.  Last year, the FCC took $4.5 billion from the USF to subsidize broadband Internet through a new fund, called the Connect America Fund (CAF)  However, with people shifting to email, texting, IP telephony and other online options, contributions to the USF are declining and would not reach the levels the FCC wanted for further support broadband Internet access.

  In April, the FCC proposed a number of ideas for "reforming" the USF contribution system - releasing a Request for Comment document.  (This is the first formal step in the FCC's rulemaking process and doesn't commit the FCC to any specific action).  Among the ideas for additional funding sources were a fee (tax) imposed on broadband Internet service, taxing text messages, and shifting the USF contribution to a flat fee per line, rather than a tax on interstate phone revenues.  The summer saw plenty of public comment.  A few large Internet players (who would likely get some of the added funds) supported the idea; while comments from the public, and from a range of public interest groups grew increasingly negative as news of the proposed new taxes spread.  The public outcry (followed by Congressional "outrage") over a possible fee (tax) on broadband Internet service in particular has now reached the point where the FCC has dropped the idea - as "politically toxic."
  An indication of how negative the public reaction was to a new broadband Internet tax is that no one at the FCC will admit to suggesting the idea - Democrats claiming it was pushed by Republicans, and Republicans suggesting that FCC Chairman Julius Genachowski's strong support for expanding broadband subsidies and access (and a number of prior public statements) is behind the push for new funding sources.  Playing the blame game, particularly during a heated election cycle, can be fun, but the basic concept of expanding the USF from basic telephone access to Internet access or broadband Internet access has been floating around for decades.  And the FCC, by transferring USF funds to the Connect America Fund last year has at least informally redefined Universal Service to include broadband Internet access.  What the current kerfuffle is about is how and where to raise additional funds to support the expanded definition.

  But the blame game is fun, so here's my take.  The specific proposals most likely came from FCC staff, who were charged with finding ways to increase USF/CAF funding.  It is true that the sole Republican commissioner at the time supported looking for ways to expand the funding base, as did at least one Republican senator.  But so did the Democratic commissioners, and Democratic congress members on the FCC oversight committees.  In addition, FCC chairman Genachowski has long been a very vocal proponent of the development and expansion of broadband Internet access.  So basically everyone thought looking for additional funding sources was a good idea; yet it seems likely that none of these major players made a specific recommendation for a broadband Internet tax.  Under that kind of directive to search for additional funding options, staffers are usually tasked with coming up with as many different proposals as they can, so that policymakers have a range of options to consider.  It often starts with ideas for new fees for related services that aren't already taxed.  Normally these ideas and proposals are pre-screened to remove those proposals that aren't politically, legally, or economically feasible - but in this case they either didn't, or they missed a few.
  However, if you need to lay the blame on either Republicans or Democrats, I'd give the edge to the Republican Commissioner Robert McDowell over Chairman Genachowski (D).  When the public concern over the proposal first surfaced, his initial reaction was to question whether the FCC had the legal authority to impose the tax.  In contrast, spokesmen for Genachowski said that the Chairman was skeptical that the tax on broadband Internet services would work, but floated the various proposals to judge public reaction - and afterwards blamed Republicans.  In addition, these kinds of policy proposals always come through the Chairman's office and with his (or one of his staffers') approval.  So the buck stops at the Chairman's office - they're at least responsible for the decision to include the various digital IP service fees/taxes in the formal request for comments, if not for coming up with the specific proposals themselves or supporting any one specific proposal.

Source -  FCC backpedals from Internet tax, Hillicon Valley blog, the Hill