Tax Status of Federal Broadband Grants Questioned
The National Association of Regulatory Utility Commissioners asked the Treasury Department for quick clarification of the tax status of broadband grants from the NTIA. NARUC warned that taxing the grants would mean they would do less to stimulate deployment. Meanwhile, Congress is closely monitoring who does and doesn’t get grants and whether they actually increase deployment, said a Congressional Research Service report released Monday.
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“You have already received a NARUC letter highlighting concerns about the possible tax treatment of smart grid grants provided under the American Reinvestment and Recovery Act,” NARUC said. “This letter raises similar concerns about grants provided under ARRA’s Broadband Technologies Opportunities Program.” The letter to Treasury Secretary Timothy Geithner was signed by NARUC President David Coen and Commissioner Ray Baum, chairman of the NARUC Telecom Committee.
Taxing grants could increase costs of service to the ratepayers that “NARUC’s members are charged to protect,” the letter said. “It most certainly will curtail the scope of grant funded broadband infrastructure, mapping, and adoption projects. Because ARRA was designed to stimulate the economy, taxing these grants is both counterproductive and clearly inconsistent with Congressional goals. An additional tax burden decreases the capital available for the projects (blunting the stimulus’ impact) and increases the cost of investments.”
The Treasury will probably make it clear soon whether the grants are taxable, predicted attorney Jim Baller of Baller Herbst. “We've been warning private-sector applicants about this issue since the beginning of round one,” Baller said.
“In general, I think it would be a … ridiculous thing to do, taxing these grants,” said analyst Craig Settles. “The whole purpose of the program is to provide financial assistance to stir the economy. The government recovers its money when new businesses and new jobs generated by these grants kick in. … This is not the type of thing you want to be blindsided with, after all the pain and aggravation [it takes] to win a grant.”
Grant recipients also are subject in some cases to state taxes. In Maryland, state Sen. Rona Kramer (D) recently asked for a advisory opinion from the state Attorney General on whether grants awarded through the ARRA are subject to state taxes. They are, the Attorney General said. “The sweeping and all-inclusive language of the Internal Revenue Code’s definition of ‘gross income’ clearly includes funds received from the federal government in the form of a federal grant,” the letter said. “The Maryland income tax law is ‘inextricably keyed’ to the federal income tax law.”
The CRS report said Congress is “closely monitoring how equitably and effectively broadband grants are allocated among states and the various stakeholders,” and homing in on job creation and long-term economic benefits expected from improved broadband availability, access and adoption. “A continuing issue is how to strike a balance between providing federal assistance for unserved and underserved areas where the private sector may not be providing acceptable levels of broadband service, while at the same time minimizing any deleterious effects that government intervention in the marketplace may have on competition and private sector investment.”
“The unprecedented scale and scope of the ARRA broadband programs, coupled with the short time frame for awarding grants, presents daunting challenges with respect to program implementation as well as Congressional oversight,” the report said. In recent oversight hearings, members of Congress have questioned agencies’ ability to meet the Sept. 30 deadline, and Republicans have raised flags about funding for projects in areas with an incumbent broadband provider (CD March 5 p3).