ECONOMICEFFECTSOFBROADBANDINFRASTRUCTURE DEPLOYMENTANDTAXINCENTIVESFORBROADBAND DEPLOYMENT

HALJ.SINGER JEFFREYD.WEST

PREPAREDONBEHALFOFTHEFIBERTOTHEHOMECOUNCIL

MARCH 2, 2010

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ECONOMICEFFECTSOFBROADBANDINFRASTRUCTURE DEPLOYMENTANDTAXINCENTIVESFORBROADBAND DEPLOYMENT

HALJ.SINGER1 JEFFREYD.WEST2 MARCH2,2010 ABSTRACT
Without any regulatory intervention, broadband service providers (BSPs) are prepared to invest nearly $30 billion per year over the coming years in nextgeneration access technologies. This investmentwillsupporthundredsofthousandsofdomesticjobsandwillstimulateactivityintheU.S. economy.YetthisinvestmentwillnotresultinubiquitousavailabilityofbroadbandforU.S.consumers, nor will it result in competitive access to faster, nextgeneration broadband services for a large portionofconsumers.TheFibertotheHomeCouncilhasproposedthattheFederalCommunications Commission address this shortfall in broadband deployment in the National Broadband Plan. Specifically,theCouncilrecommendsthattheCommissionadopttwoprincipalgoalsforthePlan,both tobeachievedby2015: (1)universalaccess tocurrentgenerationbroadbandcapabilityat3Mbps downstreamand768Kbpsupsteam;and(2)80%ofhomespassedwithcompetitivenextgeneration broadbandcapabilityat50Mbpsdownstreamand20Mbpsupstreamdeliveredatpeakperiods.This paper presents the economic impact in terms of job creation and economic output associated with achieving the goals espoused by the Council. It also examines, as an illustrative example of a policy designedtoachievethesegoals,theuseoftaxincentivestoBSPstowiremarginallyprofitableareas. Inthisstudy,weanalyzetheeffectoftwopotentialtaxincentivescapitalexpensingallowancesand taxcreditbondsonBSPinvestments,andweestimatethemarginaleffectsoneconomicactivityand job creation. In particular, we estimate the additional number of homes passed that would be attributable to the tax incentives above and beyond what would be occur in its absence of any incentive,andwecalculatetheassociated,incrementaleconomicimpact.

1. Hal J. Singer is a Managing Director at Navigant Economics, and Adjunct Professor at McDonough SchoolofBusiness,GeorgetownUniversity. 2. Jeffrey D. West is an Associate Director at Navigant Economics. The authors would like to thank Corning,Inc.forfunding.

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Contents
I. II. INTRODUCTIONANDEXECUTIVESUMMARY............................................................... 3 ECONOMICEFFECTSOFINVESTMENTSREQUIREDTOMEETCURRENT GENERATIONGOAL ......................................................................................................... 6 A. B. EstimatingAdditionalCapitalExpendituresRequired ..................................... 6 AnalysisofDirectEffects ..................................................................................... 8 1. 2. C. 1. 2. III. MethodologyandAssumptions ............................................................... 8 ResultsofDirectEffectsAnalysis .......................................................... 10 MethodologyandAssumptions ............................................................. 11 ResultsofIndirectEffectsAnalysis ....................................................... 11

AnalysisofIndirectEffects ................................................................................ 10

ECONOMICEFFECTSOFINVESTMENTSREQUIREDTOMEETNEXT GENERATIONGOALOFCOMPETITIVEACCESSBY2015 .......................................... 12 A. B. C. EstimatingAdditionalCapitalExpendituresRequired ................................... 12 AnalysisofDirectEffects ................................................................................... 14 AnalysisofIndirectEffects ................................................................................ 14 ExpensingProposals .......................................................................................... 18 TaxCreditBondProposal ................................................................................. 19 EstimatingAdditionalCapitalExpendituresResultingfromTax Incentives ............................................................................................................ 19 AnalysisofDirectEffects ................................................................................... 21 ImpactonTaxRevenues .................................................................................... 23 AnalysisofIndirectEffects ................................................................................ 25

IV.

THEIMPACTOFTAXINCENTIVESONINVESTMENTANDTHEECONOMY ............ 18 A. B. C. D. E. F.

V.

CONCLUSION .................................................................................................................. 25

P a g e |3 I. INTRODUCTIONANDEXECUTIVESUMMARY

In this report we analyze the economic impact of the incremental investment in broadbandtechnologiesrequiredtomeettheFTTHCouncilsproposedgoalsfortheFCCs NationalBroadbandPlan(NBP): Deploy currentgenerationaccess(3 megabits per second (Mbps) downstream, 768kilobitspersecond(Kbps)upstream)toallU.S.householdsby2015,and Serve 80 percent of all U.S. households with competitive access to next generationaccessby2015thatdeliverspeakperiodspeedsofatleast50Mbps downstreamand20Mbpsupstream. Meeting each of these goals will generate significant benefits for the U.S. economy, measured both in terms of increased gross domestic product (GDP) and increased employment. GDP and employment will increase over the next five years because of the increasedinvestmentsbybroadbandserviceproviders(BSPs)requiredtomeettheNBP goals (direct effect). Table 1 shows the economic impact of reaching each of the two objectives. TABLE1:SUMMARYOFDIRECTECONOMICEFFECTSONJOBSANDOUTPUTOFMEETINGPROPOSED OBJECTIVESOFTHENATIONALBROADBANDPLAN,20112015
CompetitiveNext Generation NoNationalBroadbandPlanobjectives Capex*($Billion,total) $37.1 $10.9 HouseholdsPassed,2015**(Million) 123.7 34.5 ProposedNationalBroadbandPlanobjectivesmet Capex*($Billion,total) $50.6 $74.3 Difference $13.6 $63.4 HouseholdsPassed,2015**(Million) 127.1 101.6 Difference 3.4 67.1 DirectEffectofAdditionalCapex Output($Billion,total) $38.0 $198.4 Jobs(AnnualIncrease) 39,961 250,397 Note: *For current generation, the capex for deployment of broadband in unserved areas. For competitive nextgeneration,thecapexfordeploymentofbroadbandoverFTTHnetworks. **Forcurrentgeneration,thenumberoftotalU.S.householdsserved.Fornextgeneration,thenumberofU.S. householdsservedbyatleasttwoproviders. Cableinvestmentisexcludedfromtheestimatesofnextgenerationbroadbandcapitalexpendituresbecause theNBPobjectivewillhavenoeffectonforecastedcableinvestment. CurrentGeneration

P a g e |4 As Table 1 shows, meeting the proposed currentgeneration objective would result in an increase of $13.6 billion in capital expenditures from 2011 to 2015. The impact of these additionalexpendituresoneconomicoutputfrom2011to2015is$38.0billion.Thetotal increase in average annual employment from 2011 to 2015 is nearly 40,000 for meeting the proposed currentgeneration objective. Meeting the proposed next-generation objective would result in an increase of $63.4 billion in capital expenditures from 2011 to 2015. The impact of these additional expenditures on economic output from 2011 to 2015 is $198.4 billion. The total increase in average annual employment is 250,000 for meeting the proposed next generation objective.3 Wehavealsobeenaskedtoanalyzetheeffectsofseveralproposedtaxincentivesto meetthecurrentandnextgenerationobjectives.Weanalyzefourspecificproposals: 1. Immediate expensing of 100 percent of investments providing 50 Mbps downstream/20MbpsupstreamservicetoanyareaintheUnitedStatesfor fiveyears(20112015);

3. Thekeyassumptionsusedtoestimatetheseresultsinclude: Acostof$4,000perhometopassthosehomesunpassedbyanybroadband,basedonFCCestimates that(1)5millionhomesarecurrentlyhavenoaccesstobroadbandwithatleast768Kbpsspeed,and (2)thecosttopassthesehomesis$20billion.Theultimateincrementalcosttoachieveubiquitous accessis$13.6billion,lessthan$20billionbecausesomehomesnotpassedtodayareforecastedto bepassedbybroadbandwithouttheNBPobjective. AnincreaseinU.S.householdsfrom117.2millionin2009to127.1millionin2015. Anincreaseinhomespassedbyanybroadbandfrom112.4millionin2009to123.7millionin2015if thereisnoNBPobjective(thebaselinescenario). An employment multiplier of 14.74 jobs per million dollars of investment in broadband to pass unservedhomes. Anoutputmultiplierof$2.806perdollarofinvestmentinbroadbandtopassunservedhomes. A7.7percentannualdeclineinthecosttopassandserveahomewithFTTHfrom2009to2015. Acostof$650toserveahomewithFTTHin2009. Acostof$700perhomepassedwithFTTHuntil54percentofhouseholdsarepassed. After 54 percent of households are passed, a cost of $1,246 per home passed with FTTH until 69 percentofhouseholdsarepassed. After 69 percent of households are passed, a cost of $1,661 per home passed with FTTH until 80 percentofhouseholdsarepassed. After 80 percent of households are passed, a cost of $2,214 per home passed with FTTH until all householdsarepassed. AnincreaseinhomespassedbyFTTHfrom18millionin2009to34.5millionin2015inthebaseline scenario(noNBPobjective). AnincreaseintheratioofhomesservedtohomespassedbyFTTHfrom25percentin2009to41.4 percentin2015. Anemploymentmultiplierof19.74jobspermilliondollarsofinvestmentinFTTH. Anoutputmultiplierof$3.129perdollarofinvestmentinFTTH.

P a g e |5 2. Immediate expensing of 100 percent of investments providing 3 Mbps downstream/768 Kbps upstream service to unserved areas in the United Statesforfiveyears(20112015); 3. Issuancebyprivatesectorentitiesofupto$10billionintaxcreditbondsper yearoverthenextfiveyears(20112015)tofundinvestmentsonbroadband deploymentsproviding3Mbpsdownstream/768Kbpsupstreamserviceto unservedU.S.households;and 4. Issuancebyprivatesectorentitiesofupto$10billionintaxcreditbondsper yearoverthenextfiveyears(20112015)tofundinvestmentsonbroadband deploymentsproviding50Mbpsdownstream/20Mbpsupstreamserviceto anyareaintheUnitedStates. EachoftheseproposalswillspurBSPstoincreasetheirinvestmentsinbroadband access technologies,thus comingcloser toachieving the objectivesfor current and next generation broadband access. Table 2 shows the economic impact of each of the four proposalsandtheireffectsonmeetingtheproposedNBPobjectives. TABLE2:SUMMARYOFDIRECTECONOMICEFFECTSONJOBSANDOUTPUTOFTAXINCENTIVESFOR MEETINGPROPOSEDOBJECTIVESOFNATIONALBROADBANDPLAN,20112015
CurrentGeneration TaxCredit Expensing Bonds AdditionalCapexResultingfromTaxIncentive ($Billion) AdditionalHouseholdsPassedResultingfromTax Incentive(Million)* DirectEffectofAdditionalCapex Output($Billion,total) Jobs(AnnualIncrease) ForgoneTaxRevenuesoverInvestmentLife ($Billion) $ForgoneTaxRevenueperDirectEffectJob DirectJobsper$MillionForgoneTaxRevenue $4.8$13.2 1.23.3 $13.3$37.2 14,01039,056 $1.7$4.6 $118,715 8.424 $13.6 3.4 $38.0 39,961 $5.2 $130,949 7.637 NextGeneration Expensing $1.4$4.1 2.05.8 $4.4$12.9 5,53016,264 $0.5$1.4 $88,636 11.282 TaxCreditBonds $50.0 57.0 $156.5 197,437 $19.1 $96,740 10.337

Note:*Forcurrentgeneration,thenumberoftotalU.S.householdsserved.Fornextgeneration,thenumberof U.S.householdsservedbyatleasttwoproviders.

As Table 2 shows, the incremental impact on economic output (above and beyond what wouldbeachievedwithouttheincentives)from2011to2015rangesfrom$4.4billionfor thenextgenerationexpensingproposalto$156.5billionforthenextgenerationtaxcredit bond proposal. The incremental increase in average annual employment sustained from

P a g e |6 2011to2015rangesfrom5,530netnewjobsforthenextgenerationexpensingproposal to197,437netnewjobsforthenextgenerationtaxcreditbondproposal.4 Table2alsoshowstheforgonetaxrevenuesfromeachproposal.Ourestimatesof forgonetaxrevenuesrepresentonlythedirecteffectofeachpolicy,anddonotaccountfor offsetting revenues resulting from increased incomes for suppliers of the inputs for broadband deployment (e.g., income taxes resulting from increased employment). Our estimatesoftheforgonetaxrevenuesoverthe15yeardepreciablelifeoftheinvestments made from 2011 to 2015 range from $0.5 billion to $19.1 billion for each of the four proposals.Thus,from2011to2015,eachofthefourproposalswillsustainanaverageof between8.4and11.3netnewjobspermilliondollarsofforgonetaxrevenueasaresultof thedirecteffectofincreasedbroadbandcapitalexpenditures. Compared toother stimulus packages,thebroadbandtaxcreditwouldbearelativelyefficientuseoftaxpayermoney.For example, the Congressional Budget Offices estimates the average number of jobs created by the American Recovery and ReinvestmentAct from 2009 to 2012 is between 700,000 and 1,875,000.5 Given the $787 billion cost of the stimulus bill, this translates to 0.89 to 2.38jobscreatedpermilliondollarsofforegonerevenue.Theefficiencyofthestimulusbill injobcreationpalesincomparisontothejobcreationofthebroadbandtaxproposals(7.6 to11.3jobspermilliondollarsofforegonerevenue). II. ECONOMICEFFECTSOFINVESTMENTSREQUIREDTOMEETCURRENTGENERATIONGOAL

Inthissection,weestimatethecapitalexpendituresnecessarytomeettheproposed NBPobjectiveofubiquitousavailabilitytocurrentgenerationbroadband.Wealsoestimate the direct and indirect economic effects of reaching this goal, in terms of increased employmentandeconomicoutput. A. EstimatingAdditionalCapitalExpendituresRequired

According to the November 2009 report Broadband in America, prepared for the FCC by the Columbia Institute for Telecommunication (CITI), 95.7 percent of households

4. Thekeyassumptionsusedtoestimatetheseresults,inadditiontothoselistedinfootnote3,include: Annualnonbonusdepreciation,basedon15yearpropertywithhalfyearconvention,at150percent decliningbalance(RevenueProcedure8757). Marginaltaxrateof35percent. BSPspriceelasticityofdemandrangesfrom0.85to2.5. BSPswillissueasmuchintaxcreditbondsasallowed. Aneffectiveinterestrateof4.78percentforthetaxcreditbonds. 5. Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From October 2009 Through December 2009, at 9 (Feb. 2010) (available at http://cbo.gov/ftpdocs/110xx/doc11044/02-23-ARRA.pdf).

P a g e |7 areforecastedtobepassedbywiredbroadbandin2015.6Inaddition,69.3percentofall households are also forecasted to be served by wired broadband in 2015. Although the report does not define the speeds of broadband used in estimating 95.7 percent homes passed, we assume for our purposes that all of the forecasted homes passed are passed withbroadbandof3Mbpsdownstream/768Kbpsupstream. To estimate the number of homes passed by 3 Mbps / 768 Kbps service by 2015 assuming there is no NBP objective of ubiquitous access, we use data from Morgan Stanleysforecastofresidentialbroadbandhomes.7MorganStanleyforecaststhenumber of homes passed for cable broadband services through 2011, but does not forecast the numberofhomespassedbyDSLservice.Weassumethatifahomeisnotpassedbycable broadband, then it is not passed by any other 3 Mbps / 768 Kbps broadband service. Furthermore,weassumethatthenumberofhomespassedbybroadbandservicewithout the NBP goal would increase by 1.57 percent annually (equal to Morgan Stanleys forecasted increase in homes passed by cable broadband from 2010 to 2011). For the number of U.S. households, we use U.S. Census data on households from 2009 (117.2 million)8andassumeaconstantannualpercentagerateofgrowthtoCSMGs2015estimate of 127.1 million households.9 Finally, we assume that all the cable broadband homes passedwillprovidebroadbandspeedsofatleast3Mbps/768Kbpsserviceby2015.Based on the forecasts of total households and homes passed by cable broadband, 9.3 million homeswillbepassedbybroadbandfrom2011to2015,leaving3.4millionhomes(equalto 2.7percentofallhouseholds)notpassedbybroadbandin2015. The FCC estimates the total cost to expand availability to the 5 million homes currentlyunservedbybroadbandis$20billionin2009.10Thistranslatestoanaveragecost todeploybroadbandoftounservedhomesis$4,000perhomepassed.Weassumethatthe costtoserveanyhomenotpassedbybroadbandfrom2011to2015is$4,000perhome.

6. Robert C. Atkinson & Ivy E. Schultz, Columbia Institute for TeleInformation (CITI), Broadband in America: Where It Is and Where It Is Going (According to Broadband Service Providers), Preliminary Report PreparedfortheStaffoftheFCCsOmnibusBroadbandInitiative,Nov.11,2009,at59[hereinafterBroadband inAmerica]. 7. Benjamin Swinburne, David Gober, & Ryan Fiftal, Morgan Stanley, Cable/Satellite: After Years of Deflation,BroadbandPricingsettoRise(Oct.20,2009),atEx.29. 8. U.S. Census Bureau, Households by Type, available at http://www.census.gov/population/socdemo/hhfam/hh1.xls 9. CSMG, National Broadband Plan Policy Evaluation (Nov. 2, 2009), at 5 [hereinafter CSMG NBP Evaluation]. 10. FederalCommunicationsCommission,NationalBroadbandPlan,SeptemberCommissionMeeting,at 16(Sep.29,2009)(availableathttp://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC293742A1.pdf).

P a g e |8 B. AnalysisofDirectEffects 1. MethodologyandAssumptions

The incremental capital expenditures that are required to meet the goal of ubiquitous currentgeneration broadband availability would have a direct, multiplicative effectonoutputandjobcreationwhentheeconomyisatlessthanfullemployment,asitis today.11 The direct effects are jobs and economic activity created as a direct result of increased outlays for equipment, increased employment for installation, and associated expenses (for example, jobs resulting from increased purchases of equipment needed for installation, such as bucket trucks and construction equipment). The most authoritative andgenerallyacceptedmeansofestimatingthedirecteffectofincreasedinvestmentisthe RIMSIImodel,developedbytheBureauofEconomicAnalysis. Toestimatethisdirecteffect,weusethemostrecentRIMSIImultipliersondetailed industriesbyNAICScode,basedon1997nationalbenchmarkinputoutputdataand2006 regional data. Broadband deployment requires capital spending on equipment and construction. Therefore, we use multipliers for telephone apparatus manufacturing, fiber opticcablemanufacturing,andconstruction.12Eisenach,SingerandWest(2009)usethese

11.Themultiplierisastandardprincipleinthemacroeconomicsliterature.See,e.g.,RUDIGER DORNBUSCH & STANLEY FISCHER, MACROECONOMICS 66 (McGraw Hill 6th ed. 1994). Richard Kahn first introduced the multiplierconceptasanemploymentmultiplier.SeeRichardF.Kahn,TheRelationofHomeInvestmentTo Employment, 41 ECON. J. 173, 17398 (1931). John Maynard Keynes expanded upon this concept by introducing the investment multiplier, which is the multiplier used in our analysis. See John Maynard Keynes,AGENERALTHEORYOFEMPLOYMENT,INTEREST,ANDMONEY115(HarcourtBrace&Co.1964)(1936). 12.U.S.DepartmentofCommerce,BureauofEconomicAnalysis,RegionalInputOutputModelingSystem (RIMSII),Table1.5(2008).Multipliersarebasedonthe1997BenchmarkInputOutputTablefortheNation and2006regionaldata.Theseindustriesapproximatelymatchtheexpendituresmadetodeployandconnect broadbandmorecloselythananyothermultipliercategory.Accordingtothe1997NAICSdefinition,industry 334210 (Telephone apparatus manufacturing) consists of [e]stablishments primarily engaged in manufacturing wire telephone and data communications equipment. These products may be standalone or boardlevelcomponentsofalargersystem.Examplesofproductsmadebytheseestablishmentsarecentral office switching equipment, cordless telephones (except cellular), PBX equipment, telephones, telephone answeringmachines,anddatacommunicationsequipment,suchasbridges,routers,andgateways.Industry 335921(Fiberopticcablemanufacturing)consistsof[e]stablishmentsprimarilyengagedinmanufacturing insulated fiberoptic cable from purchased fiberoptic strand. Industry 230000 (Construction) includes, among other types of construction establishments, [e]stablishments primarily responsible for the entire construction (i.e., new work, reconstruction, or repairs) of electric power and communicationtransmission linesandtowers,radioandtelevisiontransmitting/receivingtowers,cablelaying,andcabletelevisionlines; (2) establishments identified as power and communication transmission line construction management firms;and(3)establishmentsidentifiedasspecialtradecontractorsengagedinactivitiesprimarilyrelatedto power and communication transmission line construction. Industry 334220 (Broadcast and wireless communications equipment) includes establishments primarily engaged in manufacturing radio and television broadcast and wireless communications equipment. Examples of products made by these establishmentsare:transmittingandreceivingantennas,cabletelevisionequipment,GPSequipment,pagers,

P a g e |9 multipliers to estimate separatemultipliers for different types of broadband spending by applyingweightstoeachoftheindustrymultipliersbasedontheallocationofbroadband capital spending to each industry.13 They estimate a weighted average employment multiplierof14.7412forDSLandcablebroadband.14Theyestimateafinaldemandoutput multiplier of 2.8063 for DSL and cable broadband. We use these currentgeneration broadband multipliers here in our analysis of the direct effect of capital expenditures requiredtomakecurrentgenerationbroadbanddeploymentubiquitousby2015. These multipliers translate the effect of broadband capital spending on U.S. employment and GDP. The multiplicative effect occurs because higher expenditures on broadbanddeploymentequivalenttohigherdemandforconstructionandtheproductsof equipmentmanufacturerscausestheequipmentmanufacturersandconstructionfirmsto hire more employees to meet the increased demand. The equipment manufacturers incomes and construction firms incomes increase as well due to the increased expenditures, which, according to the consumption function, will increase their consumption as well. The increased consumption of equipment manufacturers and constructionfirmswillinturnincreasetheincomeandemploymentoftheirsuppliers.The incomeandemploymentofthosesupplierswillthenincrease,andsoon. These multipliers show that a $1 million increase in the final demand for current generationbroadbandinvestmentwouldcreateapproximately15newjobsnationally.The timeframe over which employment would increase is debatable. In most cases, the BEA considersoneyeartobetheappropriatetimehorizonforitsmultiplierstohaveachieved fulleffect.15Othereconomistshaveestimatedthatatleasttwoyearsmayberequiredfor incrementalinvestmenttoachieveitsfullimpactontheeconomy.16Themultipliereffectis mostfullyrealizedwhenthereissubstantialexcesscapacity, duringeconomicrecessions orsharpdeclinesinspecificsectors.GiventheslackintheU.S.economy,whichmanifests itselfintheformofaJanuary2010unemploymentrateof9.7percent,17ourestimatesof the multiplier effect of increased capital expenditures reasonably capture the effect that

cellular phones, mobile communications equipment, and radio and television studio and broadcasting equipment. See U.S. Census Bureau, 1997 NAICS and 1987 SIC Correspondence Tables, available at http://www.census.gov/epcd/www/naicstab.htm. 13. JeffreyA.Eisenach,HalJ.Singer,&JeffreyD.West,EconomicEffectsofTaxIncentivesforBroadband InfrastructureDeployment,FibertotheHomeCouncil(2009)at8. 14. Id.Table2at8.CableandDSLweightsare80percentfortelephoneapparatusmanufacturingand20 percentforconstruction. 15. U.S. DEPARTMENTOF COMMERCE, BUREAUOF ECONOMIC ANALYSIS, REGIONAL INPUTOUTPUT MODELING SYSTEM REGIONAL MULTIPLIERS: A USER HANDBOOKFORTHE REGIONAL INPUTOUTPUT MODELING SYSTEM(RIMSII),at8(Mar. 1997). 16.See,e.g.,OLIVERBLANCHARD,MACROECONOMICS7273(PrenticeHall1997). 17. Press Release, U.S. Dept. of Labor, Bureau of Labor Statistics, The Employment Situation January 2010(Feb.5,2010)(onfilewithauthors).

P a g e |10 increased capital spending by BSPs would have on the U.S. economy. Because of todays excess capacity in the labor market, the increased employment from the additional investmentaremorelikelytooccurwithinoneyearoftheinvestment(asestimatedbythe BEA)thanthetwoyearsestimatedbyothereconomists. 2. ResultsofDirectEffectsAnalysis

Table 3 shows our estimates of the direct effect of the increased capital expenditures required to reach ubiquitous deployment of currentgeneration broadband by2015. TABLE3:DIRECTECONOMICEFFECTOFEXPENDITURESREQUIREDTOREACHUBIQUITOUSDEPLOYMENT OF3MBPS/768KBPSBROADBAND,20112015
CapitalExpendituresonBroadbandinUnservedAreas($Billion) BaselineNoNBPObjective MeetNBPObjective Difference DirectEffectonEmployment(Avg.AnnualJobs) DirectEffectonGDP($Billion) Total,20112015 $37.1 $50.6 $13.6 39,961 $38.0

As Table 3 shows, we estimate that ubiquitous deployment of currentgeneration broadbandtounservedareaswillincreasecapitalexpendituresby$13.6billionfrom2011 to2015.ThisincreasewilldirectlyresultinanincreaseinGDPof$38.0billionoverthose five years. On average over the five years, the increased investment will maintain an additional39,961jobsperyear. C. AnalysisofIndirectEffects

Inadditiontothesedirecteffects,theadditionalavailabilityofbroadbandservices will result in increased adoption, which in turn will lead to increased productivity and demand for other goods and services (indirect effect). The indirect effects of increased broadbandinvestmentresultfromtheproductivityincreases,pricereductions,andrelated savingsassociatedwithincreasedbroadbandadoption.MeetingtheproposedNBPcurrent generation objective would increase broadband adoption due to increased broadband availabilityinunservedareas.Ourestimateutilizesreasonableassumptionsregardingthe impactofincreasedavailability,andappliestheresultsofauthoritativeempiricalresearch ontheimpactofbroadbandadoptiononemploymenttoestimatetheseindirecteffects.In thissection,weestimatetheindirecteffectsfromincreasedbroadbandadoptionresulting from the increased deployment necessary to meet the proposed NBP objective of ubiquitousaccesstocurrentgenerationbroadband.

P a g e |11 1. MethodologyandAssumptions

Inouranalysisofthedirecteffects,weestimatedtheeffectsresultingdirectlyfrom increased investment in broadband infrastructure. The ultimate effect of this investment, however, will be to make broadband available in areas where broadband service is unavailable today. According to Morgan Stanley, the national residential broadband penetration rate was approximately 55 percent of all households as of 2009, and was forecasted to increase to 58.2 percent as of 2011.18 We assume that households who receive broadband availability as a result of the proposed current generation goal will begin subscribing to broadband in the year following deployment, and that once subscriptionsbegin,theywillsubscribetobroadbandatthenationalaveragerateoverthe courseofthreeyearsthatis,that20percentofhouseholdswillsubscribeinthefirstyear, 40percentinthesecondyear,and60percentinthethirdyear.Underthisassumption,49 percent of all new homes passed as a result of the proposed current generation NBP objectivewouldbesubscribersasof2015. Toestimatetheimpactofincreasedbroadbandpenetrationonemployment,werely ontheresultsofa2007studypublishedbytheBrookingsInstitution.Inthatstudy,Robert Crandall, William Lehr and Robert Litan found that a one percentage point increase in broadband population penetration (defined as broadband lines per person) will increase private,nonfarmemploymentby293,200jobsoverthefollowingyear(whentheeconomy isnotatfullemployment).19 2. ResultsofIndirectEffectsAnalysis

Table 4 shows the results of our analysis of the indirect economic effects on job creation of the incremental investment required to meet the current generation NBP proposal. Specifically, we find that ubiquitous currentgeneration broadband deployment beyond what is currently forecasted would increase employment by a total of at least 149,000jobsby2015. TABLE4:SUMMARYOFINDIRECTEFFECTSOFUBIQUITOUSCURRENTGENERATIONACCESSONJOB CREATION,20112015
Additional Homes Passed (Million) Additional Subscribers (Million) Increase in Overall U.S. Broadband Penetration Rate Additional Jobs 2011-2015 3.389 1.656 0.51% 149,105

18 Benjamin Swinburne, David Gober, & Ryan Fiftal, Morgan Stanley, Cable/Satellite: After Years of Deflation,BroadbandPricingsettoRise(Oct.20,2009),atEx.29. 19 Robert Crandall, William Lehr, & Robert Litan, The Effects of Broadband Deployment on Output & Employment:ACrossSectionalAnalysisofU.S.Data,6ISSUESINECONOMICPOLICY1214(July2007).

P a g e |12 III. ECONOMICEFFECTSOFINVESTMENTSREQUIREDTOMEETNEXTGENERATIONGOALOF COMPETITIVEACCESSBY2015 Inthissection,wecomparethecurrentforecastsofinvestmentinnextgeneration broadband deployment with the investments required to achieve the goal of competitive accessto50Mbpsdownstreamspeedand20Mbpsupstreamspeedfor80percentofU.S. households by 2015. We assume that the additional investment would be fibertothe home (FTTH) exclusively. Currently, the largest FTTHproviderisVerizon, whose FTTH productiscalledFiOS. A. EstimatingAdditionalCapitalExpendituresRequired

For our baseline forecasts with no tax incentives, we use the forecasts of homes passed and homes served by FTTH for 2009 and 2015 from CSMG.20 CSMG forecasts 18 millionhomespassedbyFTTHin2009(equalto15percentofallU.S.households)and34.5 millionhomespassedin2015(equalto27percentofallU.S.households).CSMGforecasts 4.5millionhomesservedbyFTTHin2009(25percentofhomespassed)and14.3million homesservedin2015(41percentofhomespassed).Weassumeaconstantincreaseinthe numberofhomespassedandservedfortheyearsbetween2009and2015. To estimate the cost to deploy and serve ahome withFTTH, we use CSMGs2009 cost estimates, which are broken down by three levels based on the topography being passed.21CSMGestimatesproviderscosttopassahomewithFTTHtobe$700perhome passedforthelowest54thpercentileofhomes(intermsofcost),$1,246perhomepassed forthe55thto69thpercentile,and$1,661perhomepassedforthe70thto80thpercentile (33percenthigherthanthe$1,246costtopassahomeinthe55thto69thpercentile).22 CSMGdoesnotprovideacostestimatefordeployingFTTHtothecostliest20thpercentile ofhomes.Weassumethatthecostis$2,214perhomein200933percenthigherthanthe costtopassahomeinthe70thto80thpercentile.CSMGestimatesthe2009costperhome servedtobe$650forallhomesservedregardlessofarea.23After2009,weassumea7.7 percent annual decrease in the cost to pass and serve a home with FTTH, based on averages of the estimates presented by CSMG.24 Finally, we assume that 100 percent of forecastedFTTHcapitalexpenditureswouldmeetthespeedlimitsnecessaryforeligibility forthetaxexpensingandtaxcreditbondproposals.

20.CSMGNBPEvaluation,at5. 21.Id.at3536. 22.Id.at36. 23.Id. 24.Id.at35.

P a g e |13 ToestimatecapitalexpendituresrequiredtomeettheproposedNBPobjectivesfor competitive nextgeneration deployment for 80 percent of U.S. households, we first note that cable companies are already forecasted to pass 92 percent of U.S. households with DOCSIS3.0upgradedbroadbandserviceby2013.25AdvertisedspeedsforDOCSIS3.0are alreadyashighas50Mbpsand101Mbpsdownstream;26accordingly,weassumethatno incremental cable broadband investment is required to meet the proposed objective. Because at least two BSPs providing nextgeneration service are required to meet the proposedNBPobjectiveforcompetitiveaccess,weassumethatthesecondBSPinanarea alreadyforecastedtobepassedbycableisaFTTHprovider.Weassumethatthenumber ofhomespassedbynextgenerationbroadband(otherthancable)growsataconstantlevel from2010to2015.WeassumethattheratioofhomesservedtohomespassedbyFTTH remainsthesameasinthebaselinescenario.Finally,weassumethatthecostsperhome passedandhomeservedarethesameinthebaselinescenarioasinthebaselinescenario. Table 5 compares the percent of homes passed, homes served, and capital expendituresforFTTH. TABLE5:DEPLOYMENTOFFTTHREQUIREDTOPROVIDECOMPETITIVEACCESSTOBROADBANDAT SPEEDSOF50MBPSDOWNSTREAM/20MBPSUPSTREAMFOR80PERCENTOFU.S.HOUSEHOLDS, 20112015
2011 Homes Passed by FTTH (Million) Baseline - No NBP Objective Meet NBP Objective Difference Homes Served by FTTH (Million) Baseline - No NBP Objective Meet NBP Objective Difference 23.5 36.9 13.4 2012 26.3 53.1 26.9 2013 29.0 69.3 40.3 2014 31.8 85.5 53.7 2015 34.5 101.6 67.1 Total 34.5 101.6 67.1

7.8 12.2 4.4

9.4 19.0 9.6

11.0 26.4 15.3

12.7 34.1 21.4

14.3 42.1 27.8

14.3 42.1 27.8

Capital Expenditures on FTTH ($Billion) Baseline - No NBP Objective $2.5 Meet NBP Objective $13.0 Difference $10.5

$2.4 $12.4 $10.0

$2.2 $12.7 $10.5

$2.0 $16.9 $14.9

$1.9 $19.3 $17.5

$10.9 $74.3 $63.4

AsTable5shows,67.1millionadditionalhomeswouldbepassedbyFTTHiftheNBPgoal ofcompetitivedeploymentofnextgenerationbroadbandto80percentofU.S.households

25.BroadbandinAmerica,at8. 26.Id.

P a g e |14 wasmetin2015.Anadditional$63.4billionincapitalexpendituresisrequiredfrom2011 to2015tomeetthenextgenerationNBPobjective. B. AnalysisofDirectEffects

As with the currentgeneration objective, the incremental broadband capital expendituresthatresultfrommeetingthegoalofwidespreadcompetitiveaccesstonext generationbroadbandwillhaveamultiplicativeeffectontheeconomywhentheeconomy is at less than full employment. Using the same multipliers for telephone apparatus manufacturing, fiber optic cable manufacturing, and construction discussed above, Eisenach,SingerandWest(2009)estimateseparatemultipliersfordifferenttypesofnext generation broadband spending by applying weights to each of the industry multipliers basedontheallocationofbroadbandcapitalspendingtoeachindustry.27Theyestimatea weightedaverageemploymentmultiplierof19.7437andafinaldemandoutputmultiplier of3.1293forFTTH.28 TABLE6:DIRECTECONOMICEFFECTOFEXPENDITURESREQUIREDTOREACHDEPLOYMENTOF80 PERCENTOFHOUSEHOLDSWITHATLEASTTWOPROVIDERSOF50MBPS/20MBPSBROADBAND 20112015
2011 Capital Expenditures on FTTH ($Billion) Baseline - No NBP Objective Meet NBP Objective Difference Direct Effect on Employment (Jobs) Direct Effect on GDP ($Billion) $2.5 $13.0 $10.5 206,773 $32.8 2012 $2.4 $12.4 $10.0 198,408 $31.4 2013 $2.2 $12.7 $10.5 207,744 $32.9 2014 $2.0 $16.9 $14.9 294,141 $46.6 2015 $1.9 $19.3 $17.5 344,922 $54.7 Total $10.9 $74.3 $63.4 250,397 $198.4

As Table 6 shows, the increase in broadband capital expenditures would result in an averageincreaseof250,000newjobssustainedeachyearfrom2011to2015andatotal increaseinGDPof$198.4billion. C. AnalysisofIndirectEffects

As with the currentgeneration broadband ubiquitous access goal, the increased competitive availability of nextgeneration broadband services will result in increased adoption,whichinturnwillleadtoincreasedproductivityanddemandforothergoodsand services. These indirect effects of increased broadband investment result from the

27. JeffreyA.Eisenach,HalJ.Singer,&JeffreyD.West,EconomicEffectsofTaxIncentivesforBroadband InfrastructureDeployment,FibertotheHomeCouncil(2009)at8. 28. Id.Table2at8.FTTHweightsare30percentfortelephoneapparatusmanufacturing,20percentfor fiberopticcablemanufacturing,and50percentforconstruction.

P a g e |15 productivity increases, price reductions, and related savings associated with increased broadband adoption. The increase in competitive nextgeneration access would increase broadband adoption due to the reduced prices and improved quality associated with the availabilityofmoretechnologicallyadvancedbroadbandinfrastructuresgenerally. We model the adoption effect of increased competitive highspeed broadband access(50/20Mpbs)asaneffectivereductionintheprice,wherepriceismeasuredasthe monthlycostperdownstreammegabit.29AsshowninTable7below,thepricepermegabit forhighspeedservicesisfarlowerthanforslowerDSLandcableconnections.

29.Price per megabit is a widely utilized measure of broadband pricing, as it captures the quality element associated with higher speed services. See, e.g., OECD Broadband Portal, available at http://www.oecd.org/sti/ict/broadband.

P a g e |16 TABLE7:COMPARISONOFBROADBANDSPEEDSANDPRICES
Provider Time Warner AT&T Comcast Verizon Time Warner AT&T Qwest AT&T Verizon AT&T AT&T Time Warner Qwest Verizon Time Warner AT&T Comcast Qwest Cablevision Verizon Comcast AT&T Qwest Verizon Cablevision Verizon Cablevision Service Type Cable DSL Cable DSL Cable DSL DSL DSL DSL DSL FTTN Cable DSL DSL Cable FTTN Cable DSL Cable FTTH Cable FTTN DSL FTTH Cable FTTH Cable Download Speed 768 Kbps 768 Kbps 1 Mbps 1 Mbps 2 Mbps 2 Mbps 2 Mbps 3 Mbps 3 Mbps 6 Mbps 6 Mbps 7 Mbps 7 Mbps 7 Mbps 10 Mbps 10 Mbps 12 Mbps 12 Mbps 15 Mbps 15 Mbps 16 Mbps 18 Mbps 20 Mbps 25 Mbps 30 Mbps 50 Mbps 101 Mbps Monthly Price $19.95 $19.95 $24.95 $17.99 $34.95 $25.00 $39.99 $30.00 $29.99 $35.00 $43.00 $47.95 $46.99 $39.99 $59.90 $55.00 $42.95 $56.99 $44.95 $44.99 $52.95 $65.00 $69.99 $64.99 $54.90 $139.95 $99.95 $/Mbps $25.98 $25.98 $24.95 $17.99 $23.30 $16.67 $26.66 $10.00 $10.00 $5.83 $7.17 $6.85 $6.71 $5.63 $5.99 $5.50 $3.58 $4.75 $3.00 $3.00 $3.31 $3.61 $3.50 $2.60 $1.83 $2.80 $0.99

Source:BroadbandinAmerica,at3839.

We estimate conservatively that the effect of 50/20 Mbps fiber deployment in an areaalreadyservedbybroadbandistoreducetheaveragepriceofbroadbandinthatarea by $4.13 per month per megabitthat is, by approximately the difference between an averageofthecurrentpricingplansfor3to15Mbps($6.00/Mbps/month)andtheaverage ofpricingplansfor30+Mbps($1.87/Mbps/month). To estimate the effect of reduced prices on broadband penetration in these areas, we rely on Atkinson, et al. (2008) who find that a $1 per month reduction in price per

P a g e |17 megabit increases broadband penetration by 2.4 percentage points.30 We assume the full effectofreducedpriceswouldbefeltoverfouryears,beginningoncethedeploymenthas been made (i.e., at the end of each year). Thus, a $4.13 reduction in price/Mbps would resultina9.91percentagepointincreaseinbroadbandpenetrationbytheendof2015.31 Finally, we use the same estimates discussed above from the 2007 Brookings Institution study to estimate the increase in employment resulting from increased broadband penetration. Inaddition,weassumethat10percentofallhomespassedbyfiberasaresultofthe various50/20Mbpsproposalswouldbelocatedinareasthatwouldnothavebroadband availabilitywithouttheexpandedfiberdeployment.Therefore,weassumethat49percent ofthosenewlypassedhomesbecomebroadbandsubscribersbytheendof2015,justaswe assumed in our analysis above of the indirect effects of the proposed current generation goal. Table 8 shows the results of our analysis of the effects of each proposal on broadband adoption, and the resulting indirect economic effects on job creation. Specifically, we find that meeting the proposed NBP nextgeneration objective would increase the number of U.S. broadband subscribers by 7.3 million, increase the U.S. broadband penetration rate (defined as broadband subscriber lines per person) by 2.3 percent,andincreaseemploymentbyatotalof660,000jobsby2015. TABLE8:SUMMARYOFINDIRECTEFFECTSOFINCREASEDCOMPETITIVENEXTGENERATIONBROADBAND ACCESSONJOBCREATION,20112015
2011-2015 Additional homes passed by any broadband (Millions) Next-generation (FTTH) Any broadband Additional broadband subscribers (Millions) Next-generation (FTTH) Any broadband Increase in Overall U.S. Broadband Penetration Rate Additional Jobs 67.1 6.7 7.3 7.3 2.3% 660,071

30.Robert D. Atkinson, Daniel K. Correa, and Julie A. Hedlund, Explaining International Broadband Leadership,InformationTechnologyandInnovationFoundation(May2008). 31.Forexample,ifthenumberofhouseholdspassedbyFTTHincreasedby1,000asaresultofeffortsto meet the proposed NBP nextgeneration objective, we estimate that 99.1 additional households become subscribersduringtheperiodofourprojection.

P a g e |18 IV. THEIMPACTOFTAXINCENTIVESONINVESTMENTANDTHEECONOMY Investmenttaxincentiveswouldserveanimportantroleinachievingtheproposed NBPcurrentandnextgenerationgoals.Taxincentiveswouldhelpachievetheobjectives byreducingtheaftertaxcostofinvestmentandthusincreasingtheeffectiverateofreturn oninvestment(ROI)fromwhatitwouldbeintheabsenceofthetaxincentive.Asaresult, firms choose to make investments that would otherwise be uneconomic, and the overall amountofinvestmentintheeconomyincreasesaccordingly.32 Weanalyzetwospecificproposalseachforcurrentgenerationandnextgeneration deployments.Inthissection,webrieflydescribeeach. A. ExpensingProposals

Expensing (or accelerated depreciation) affects the aftertax cost of investment by allowingafirmtodeductfromitstaxableearningsthefullamountspentontheinvestment, rather than stretching that deduction out based on the depreciation schedule for that investment.Theaftertaxcostoftheinvestmentisthusreducedbythedifferencebetween thevalueofthetaxdeductiontakeninyearone,ontheonehand,andthepresentvalueof the flow of tax deductions that would otherwise be taken over the life of the equipment. The impact of expensing thus depends on the depreciation life (for tax purposes) of the eligibleinvestment,andontheapplicabletaxrate.

32. The evidence of increased economic benefits from tax incentives for capital spending is widespread. For example, the Institute for Policy Innovation has found that tax cuts designed to decrease the cost of capital investment generate the biggest economic benefits. See Aldona Robbins & Gary Robbins, Whats the Most Potent Way to Stimulate the Economy?, Institute for Policy Innovation Issue Brief, Oct. 10, 2001, available at http://www.ipi.org/IPI%5CIPIPublications.nsf/PublicationLookupFullTextPDF/CD7A8BCC847C6B2586256AE10 07ADDA9/$File/IB-Stimulus.pdf?OpenElement. Two former Treasury Department officials recently argued that Capital investment is a sure-fire way of creating jobs and income, and more if it is badly needed. Ernest S. Christian & Gary A. Robbins, Obamas Best Jobs Idea, WALL ST. J., Dec. 12, 2009, available at http://online.wsj.com/article/SB10001424052748704517504574589983993789584.html. In particular, complete expensing of the cost of capital would encourage investment. See R. Glenn Hubbard, A Fiscal Plan with Global Benefits, FINANCIAL TIMES, Mar. 18, 2005. Increased capital expensing is therefore supported by the U.S. Chamber of Commerce. See Statement by U.S. Chamber Vice President and Chief Economist Martin Regalia before the House Small Business Subcommittee on Tax, Finance, and Exports on Small Business Expensing Provisions, Apr. 3, 2003, available at http://www.uschamber.com/issues/testimony/2003/030403regalia.htm. Long-term growth and increased employment would be the direct result of increased investment through accelerated depreciation (such as complete expensing). See Frederick w. Smith, One Simple Way to Create Jobs, WALL STREET JOURNAL, Feb. 5, 2010; Council on Competitiveness, Rebound: Three Essentials To Get the Economy Back on Track, available at http://www.compete.org/publications/detail/632/rebound; Bruce Bartlett, A Republican Strategy for Stimulus, FORBES.COM, Jan. 16, 2009, available at http://www.forbes.com/2009/01/15/republicans-taxes-investment-opedcx_bb_0116bartlett.html; N. Gregory Mankiw, Tax Cuts Might Accomplish What Spending Hasnt, N.Y. TIMES, Dec. 12, 2009, available at http://www.nytimes.com/2009/12/13/business/economy/13view.html.

P a g e |19 50/20 Mbps: The specific expensing proposal we were asked to analyze would allowforimmediateexpensingof100percentofinvestmentsmadeoverfiveyears(2011 2015) that provide 50 Mbps downstream/20 Mbps upstream service to any area in the UnitedStates. 3 Mbps / 768 Kbps: The second specific expensing proposal we were asked to analyze would allow for immediate expensing of 100 percent of investments made over five years (20112015) that provide 3 Mbps downstream/768 Kbps upstream service to areasintheUnitedStatescurrentlyunservedbyanybroadbandserviceofthatspeed. B. TaxCreditBondProposal

Taxcredit bonds are debt instruments that qualify bondholders to receive tax credits from the U.S. Treasury, effectively reducing the bondholders tax liability by an amountequaltothetaxcredit.Asaresult,theyieldrequiredtosellsuchbondsatparis reducedbythevalueofthetaxcredittothebondspurchasers. ThetaxcreditbondproposalswewereaskedtoanalyzecallfortheSecretaryofthe Treasurytoestablishtaxcreditsthatwouldallowissuerstosellthebondsatazerocoupon rate. Thus, bondholders would receive tax credits equal to the amount they would have received in interest had the bonds been sold without the tax credit. Under the next generation proposal, private sector entities would be able to borrow up to $10 billion in taxcredit bonds per year over the next five years (20112015) to fund investments on broadbanddeploymentsproviding50Mbpsdownstream/20Mbpsupstreamservicetoany area in the United States. Under the currentgeneration proposal, private sector entities wouldbeabletoborrowupto$10billionintaxcreditbondsperyearoverthenextfive years (20112015) to fund investments on broadband deployments providing 3 Mbps downstream/768KbpsupstreamservicetoanyareaintheUnitedStatesunservedbyany broadbandserviceofthatspeed. C. EstimatingAdditionalCapitalExpendituresResultingfromTaxIncentives

Toestimatetheadditionalcapitalexpendituresonbroadbanddeploymentresulting from the proposed tax incentives, we make several assumptions about the effects of expensing and tax credit bonds on the cost of deployments. Each expensing proposal lowers the aftertax cost of the goods and services purchased through a BSPs capital investments. Under the 100 percent tax expensing proposal, expenditures are expensed completelyintheyeartheyaremade.Withouttheexpensingproposal,thoseexpenditures would have been expensed over several years according to the appropriate depreciation schedule. To estimate the effective decrease in cost resulting from the tax expensing proposal, we estimate the net present value (NPV) of the forgone tax savings in future yearsforthebroadbandproviderresultingfromtheimmediateexpensingofcapitalinyear one underthe proposal. We assume that the investment is 15year depreciable property, and the taxpayer follows a halfyear convention and applies a 150 percent declining

P a g e |20 balancedepreciationmethod.Therefore,froma$100investment,wededuct$5fornormal firstyear depreciation. This leaves $95 to be deducted under broadband expensing. We thendeterminetheNPVofa$95taxdeduction,whichweestimateat$33.25,assuminga 35percentcorporatetaxrate.Next,usingaweightedaveragecostofcapital(WACC)of10 percent,wereduce$33.25bytheNPVoftheyear215depreciationdeductionsthatwould have been available in the absence of broadband expensing, equal to $18.17. Reducing $33.25 by $18.17, the remaining $15.08 would be the benefit of 100 percent broadband expensing,equatingto15.08percentofthetotalinvestment. Toestimatechangesincapitalexpendituresresultingfromtheloweraftertaxcost oftheproductsandservicespurchasedbyBSPsduetotheexpensingproposals,weassume thattheelasticityoftheBSPsdemandforthoseproductsandservicesisbetween0.85and 2.5.Withanelasticityofdemandof0.85,areductionintheBSPscostofexpendituresof1 percentwillincreaseitsdemandforthoseproductsandservicesby0.85percent.Likewise, anelasticityof2.5indicatesthatareductionintheBSPscostofexpendituresof1percent willincreaseitsdemandforthoseproductsandservicesby2.5percent. As discussed above, the taxcredit bond proposals call for the Secretary of the Treasurytoestablishtaxcreditsthatallowthebondstobesoldatazerocouponratethat is,providingtheeligibleborrowerswithinterestfreefinancingfortheeligibleprojects.We assumethatthesetermsaresufficientlyattractivethatthebondswouldbeutilizedupto thespecifiedlimitsthatis,$10billionannually.Weassumethatanequalamountof$10 billioninprivatesectortaxcreditbondsareissuedannuallybeginningin2011. Further,becausetheproposalcallsfortheprivatebondstobeusedonlytofinance projectsapprovedbystatepublicutilitycommissions,weassumethat100percentofthe investmentthatresultsisincrementalthatis,usedforprojectsthatwouldnototherwise have been undertaken. Hence, we assume that the effect of each of the taxcredit bond proposals is to increase total investment in current and nextgeneration broadband projects by an average of $10 billion annually for five years, or until deployment is ubiquitous. Finally, all of our estimates assume continuation of the current regulatory environment for broadband deployment and access. Any additional regulations, such as open access rules for FTTH or net neutrality rules, would decrease the baseline investments and our estimates of incremental investments attributable to the tax incentives.33

33.SeeRobertW.Crandall&HalJ.Singer,TheEconomicImpactofBroadband(2010)foradiscussionof howthoseproposalswoulddecreaseaBSPsincentivestoinvestininfrastructure.

P a g e |21 TABLE9:INCREMENTALCAPITALEXPENDITURESRESULTINGFROMBROADBANDTAXINCENTIVES
Baseline Current-Generation Homes Passed in 2015 (Million) Capital Expenditures on Unpassed Homes, 2011-2015 ($Billion) Next-Generation Homes Passed in 2015 (Million) Homes Served in 2015 (Million) Capital Expenditures, 2011-2015 ($Billion) 123.7 $37.1 Meet NBP Goal 127.1 $50.6 100% Tax Expensing 124.8 - 127.0 $41.8 - $50.3 Tax Credit Bonds 127.1 $50.6

34.5 14.3 $10.9

101.6 42.1 $74.3

36.5 - 40.3 15.1 - 16.7 $12.3 - $15.0

91.5 37.9 $60.9

AsTable9shows,thetaxexpensingproposalincreasesthenumberofhomeswithaccessto currentgenerationbroadbandtobetween124.8millionand127.0million.Thetaxcredit bondproposalresultsinubiquitousdeploymentofcurrentgenerationbroadband.Thetax expensing proposal for nextgeneration broadband increases the number of homes with competitive access to 50/20 Mbps broadband from 34.5 million to between 36.5 million and 40.3 million in 2015. This increase is far short of the increase needed to reach 80 percentofallU.S.households(101.6million)in2015.Thetaxcreditbonds,however,result in91.5millionhomeswithcompetitiveaccessto50/20Mbpsbroadband,muchcloserto thegoalof101.6millionhomespassed. D. AnalysisofDirectEffects

Table10showsourestimatesofthedirecteffectofincreasedcapitalexpenditures in broadband ifthe 3Mbps/768 Kbps broadband expensing proposal isimplemented for 20112015. TABLE10:DIRECTECONOMICEFFECTOF3MBPS/768KBPSTAXINCENTIVEPROPOSALS,20112015
TaxExpensing CapitalExpendituresonBroadbandinUnservedAreas($Billion) BaselineNoNBPObjective $37.1 TaxIncentive $41.8$50.3 Difference $4.8$13.2 DirectEffectonEmployment(Avg.AnnualJobs) 14,01039,056 DirectEffectonGDP($Billion) $13.3$37.2 TaxCreditBonds $37.1 $50.6 $13.6 39,961 $38.0

As Table 10 shows, we estimate that the 3 Mbps/768 Kbps expensing proposal will increasecapitalexpendituresonbroadbandbybetween$4.8billionand$13.2billionfrom 2011 to 2015. This increase will directly result in an increase in GDP of between $13.3 billionand$37.2billionoverthefiveyears.Onaverageoverthefiveyears,theincreased investmentwillmaintainanadditional14,010to39,056jobsperyear.Thedirecteffecton

P a g e |22 theeconomyofthetaxcreditbondproposalwouldbe39,961newjobssustainedperyear anda$38.0billionincreaseinGDPfrom2011to2015. Table11showsourestimatesofthedirecteffectofincreasedcapitalexpenditures inFTTHifthe50/20Mbpsbroadbandexpensingproposalisimplementedfor20112015. TABLE11:DIRECTECONOMICEFFECTOF50/20MBPSTAXEXPENSINGPROPOSAL

2011 CapitalExpendituresonFTTH($Billion) BaselineNoNBPObjective 100%TaxExpensing Difference DirectEffectonEmployment(Jobs) DirectEffectonGDP($Billion) $2.5 $2.9$3.5 $0.3$1.0 6,44518,956 $1.0$3.0 2012 2013 2014 2015 Total $10.9 $12.3$15.0 $1.4$4.1 5,53016,264 $4.4$12.9 $2.4 $2.2 $2.0 $1.9 $2.7$3.2 $2.4$3.0 $2.3$2.8 $2.1$2.5 $0.3$0.9 $0.3$0.8 $0.3$0.8 $0.2$0.7 5,95117,502 5,49516,161 5,07314,922 4,68413,778 $0.9$2.8 $0.9$2.6 $0.8$2.4 $0.7$2.2

As Table 11 shows, we estimate that the 50/20 Mbps expensing proposal will increasecapitalexpendituresonFTTHbybetween$1.4billionand$4.1billionfrom2011 to2015,dependingonthescenarioandelasticitiesused.Thisincreasewilldirectlyresult in an increase in GDP of between $4.4 billion and $12.9 billion over the five years. On averageoverthefiveyears,theincreasedinvestmentwillmaintainanadditional5,530to 16,264jobsperyear. Table 12 shows the direct effect on the economy of $10 billion in additional investmentonnextgenerationbroadbandeachyearfrom2011to2015thatresultsfrom theproposedprivatesectortaxcreditbondsfornextgenerationdeployments. TABLE12:DIRECTECONOMICEFFECTOFPRIVATESECTORTAXCREDITBONDSFORNEXTGENERATION DEPLOYMENTS
2011 CapitalExpendituresonFTTH($Billion) BaselineNoNBPObjective $2.5 TaxCreditBonds $12.5 Difference $10.0 DirectEffectonEmployment (Jobs) 197,437 DirectEffectonGDP($Billion) $31.3 2012 $2.4 $12.4 $10.0 197,437 $31.3 $2.2 $12.2 $10.0 197,437 $31.3 2013 $2.0 $12.0 $10.0 197,437 $31.3 2014 $1.9 $11.9 $10.0 197,437 $31.3 2015 $10.9 $60.9 $50.0 197,437 $156.5 Total

As Table 12 shows, we estimate that the private sector taxcredit bond proposal will increasecapitalexpendituresoneligiblenextgenerationdeploymentsby$50billionfrom 2011to2015.Thisincreasewilldirectlyresultina$156.5billionincreaseinGDPoverthe five years. On average over the five years, the increased investment will maintain an additional197,000jobsperyear.

P a g e |23 E. ImpactonTaxRevenues

The impact on tax revenues of the expensing proposals is dependent upon the change in investment and the change in the timing of expensing. When a firm incurs additional costs, it will be able to deduct those costs from its taxable income, thereby reducingthefirmstaxliability.Althoughchangesinthetimingofexpensingwillreducetax revenuesintheshortrun,(undiscounted)taxrevenuesoverthelifeoftheinvestmentwill be unchanged as long as the amount invested does not change, and assuming the firms marginaltaxrateremainsconstantovertime. We estimate the forgone tax revenues resulting from the proposed tax expensing incentivesbycalculatingtheannualtaxsavingseachfirmenjoysbothwithandwithoutthe incentive.Afirmstaxsavingsinyeart(taxt)fromanyinvestmentoriginallymadeinyeark (invk)canbewrittenas:
taxt=(invk*taxratet*exp_ratet=k)+(invk*taxratet*(1exp_ratek)*dep_ratet) (a) (b)

Part (a) represents the tax savings from an expensing rate of exp_rate in the year of the investment. Part (b) represents the tax savings from the depreciation schedule where dep_ratetisthepercentoftheinvestmentremainingafterexpensingthatisdepreciatedin year t. With no tax incentives, the expensing exp_ratek rate is zero. With the 100 percent expensing proposal, invk increases (relative to no tax incentive) and exp_ratek is 100 percent. We assume a 35 percent marginal tax rate taxratet when estimating the tax revenueimpact. Theforgonetaxrevenuesresultingfromthetaxcreditbondproposalsarefunctions ofinterestratesandtaxrates.Theeffectiveinterestrateonprivateborrowingsunderthe taxcreditbondproposalwillreflecttwofactors.First,becauseinterestonthebondswill effectivelybepaidbytheU.S.Treasury(intheformoftaxcredits),thedefaultriskonthe interest component is effectively zero.Second, the default risk on the principal will be a function of the risk characteristics of the issuers, which may range from major U.S. corporations to smaller (and hence riskier) companies.For purposes of arriving at an estimate of the forgone tax revenues, we assume that these two factors result in an effectiveinterestrateof4.78percent,equaltotheaverageofthecurrentyieldfor10year (4.69 percent) and 20year (6.46percent) Arated corporate bondsand the currentyield for 10year (3.59 percent) and 20year (4.36 percent) Treasury bonds.34 The forgone tax

34.Yahoo! Finance, Composite Bond Rates (http://finance.yahoo.com/bonds/composite_bond_rates); Federal Reserve Board, Federal Reserve Statistical Release H.15, Selected Interest Rates (http://www.federalreserve.gov/releases/h15/data.htm).RatesasofFebruary5,2010.

P a g e |24 revenuesineachyearuntilmaturityresultingfromtheprivatetaxcreditbondproposalis equaltotheeffectiveinterestratemultipliedbytheamountissued. Table 13 shows the estimates of forgone tax revenues resulting from the tax incentives and changes in capital expenditures. Table 13 shows both the impact on tax revenues from 20112015 and the impact on revenues over the entire life of the investmentsmadein20112015.35FollowingtheJointCommitteeonTaxation,wedonot discountthetaxrevenuecostoftheproposals.36 TABLE13:IMPACTOFTAXINCENTIVEPROPOSALSONTAXREVENUES($BILLIONS)
TaxRevenue Reductionover Entire15YearLife of20112015 Investments* $1.663$4.637 $5.233 $0.490$1.442 $19.10

Proposal CurrentGeneration 100%Expensingfor3Mbps/768Kbps PrivateSectorTaxCreditBondsfor3Mbps/768Kbps NextGeneration 100%Expensingfor50/20Mbps PrivateSectorTaxCreditBondsfor50/20Mbps

20112015Tax RevenueReduction $6.077 $7.905 $1.997

$3.415 $4.367 $7.16

*Forgonerevenuesinthiscolumnfortaxcreditbondsrepresentinterestpaymentsovertenyearsfrom20112020.

AsTable13shows,theeffectoftheproposed100percentexpensingfornextgeneration deploymentcapitalexpendituresreduces20112015taxrevenuesbybetween$3.4billion and$4.4billion.Theeffectovertheentirelifeoftheincreasedinvestmentsmadein2011 2015 is between $490 million and $1.442 billion for the 100 percent nextgeneration expensing proposal. The effect over the entire life of the investments is smaller than the effectover2011to2015becausetheTreasuryreceivesmoreintaxrevenuesintheyears after2011under100percentexpensingthanitdoeswithout100percentexpensing.When 100 percent of an investment is expensed in the first year, there will be no more investmenttodeductfromfutureyearsearnings.Without100percentexpensing,thereare depreciatedcoststodeductfromearningsineveryyearthroughyear16oftheinvestment. The effect of the proposed 100 percent expensing for currentgeneration deploymentcapitalexpendituresreduces20112015taxrevenuesbybetween$6.1billion and$7.9billion.Theeffectovertheentirelifeoftheincreasedinvestmentsmadein2011

35.Fortaxcreditbonds,wecalculateforgonetaxrevenuesbasedontheJointCommitteeonTaxations usualmethodofestimatingtaxeffectsoveratenyearbudgetwindow,ratherthantheentirelifeofthebonds. 36.JointCommitteeonTaxation,OverviewofRevenueEstimatingProceduresandMethodologiesUsedby theStaffoftheJointCommitteeonTaxation(Feb.2,2005),at12(http://www.house.gov/jct/x105.pdf).

P a g e |25 2015 due to the currentgeneration expensing proposal is between $1.7 billion and $4.6 billion. By focusing only on firms increased expenses, Table 13 overstates the true net impact of the various tax proposals on tax revenues. We do not attempt to estimate the increase in tax revenues that would result from the tax incentives in our analysis. For example, increased employment through the direct effects would result in increased personalincomes,whichwouldresultinincreasedincometaxrevenues.Inaddition,firms making the investments would see their profits increase through greater consumption of theirbroadbandservices,whichwouldincreasetheircorporateincometaxes. F. AnalysisofIndirectEffects

Table 14 shows the indirect effects of the tax incentive proposals. Specifically, we find that the various tax proposals would increase the number of U.S. broadband subscribersbybetween216,000and6.0million,increasetheU.S.broadbandpenetration rate(definedasbroadbandsubscriberlinesperperson)bybetween0.07percentand1.84 percent,andincreaseemploymentbybetween19,000jobsand540,000jobs. TABLE14:SUMMARYOFINDIRECTEFFECTSOFTAXINCENTIVESONJOBCREATION,20112015
CurrentGeneration TaxCredit 100%Expensing Bonds Additionalhomespassedbyanybroadband(Millions) Nextgeneration(FTTH) Anybroadband Additionalbroadbandsubscribers(Millions) Nextgeneration(FTTH) Anybroadband IncreaseinOverallU.S.BroadbandPenetrationRate AdditionalJobs 1.1883.312 0.5671.609 0.17%0.49% 51,022144,956 3.389 1.656 0.51% 149,105 NextGeneration 100%Expensing 1.9755.808 0.1970.581 0.2160.634 0.2160.634 0.07%0.19% 19,41557,104 TaxCreditBonds 57.033 3.389 5.992 5.992 1.84% 539,664

V.

CONCLUSION

In this study, we have calculated the total economic impact of four different tax incentive proposals relating to increasing broadband deployment and adoption. We find thateachofthefourproposalsgeneratessubstantialbenefitstotheU.S.economy,through both increased economic output and increased employment. Each of the tax proposals woulddirectlyresultinthousandsofadditionaljobssustainedperyearfrom2011to2015. The number of new jobs sustained from 2011 to 2015 resulting directly from the next generationtaxcreditbondproposalaloneisashighas197,000.Theseproposalsresultin even further job creation through their indirect effect of increased broadband adoption. Given these proposals relatively small impact on tax revenues compared to the large resulting increases in GDP and employment, their longrun benefits in increasing

P a g e |26 productivityandcompetitiveness,andtheirsignificantandvirtuallyimmediateimpacton economic activity,37 the adoption of any of these proposals would create substantial net benefitstotheU.S.economy.

37.Foradiscussionoftheimportanceoftimingintheeffectivenessoffiscalstimuluspolicies,seePeter R. Orszag, Options for Responding to ShortTerm Economic Weakness, Testimony Before the Committee on Finance,UnitedStatesSenate(January22,2008),especiallyat5(Thetimingoffiscalstimulusiscritical.If the policies do not generate additional spending when the economy is in a phase of very slow growth ora recession,theywillprovidelittlehelptotheeconomywhenitisneeded.)andat8(Taxcutsforbusiness investment may be more effective in boosting shortterm demand if they are temporary than if they are permanent.Firmsmayviewthemasonetimeopportunitiesfortaxsavings,whichmayinducefirmstomove upsomeoftheirfutureinvestmentplanstothepresent.)