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Chicago’s Netflix Tax: Targeting the Cord Cutters?

As the city’s telecommunication-tax revenues crater, it’s implementing a new tax on cloud services and streaming media. It comes as a shock to many, but the city already taxes most of your leisure activities.

Photo: Michael Tercha/Chicago Tribune

Yesterday The Verge’s Russell Brandom drew attention to a story that had flown under the radar: Chicago’s new tax on cloud computing services. Technically, it’s two taxes, one on streaming entertainment, which immediately got a lot of attention, and one on “nonpossesory computer leases,” which covers things like research databases and cloud services.

In the story, Brandom makes an important point:

But while the law may seem onerous, it’s also a response to an increasingly difficult reality for cash-strapped cities, particularly as online services start to take a bite out of the businesses in the urban center. Twenty years ago, the same albums and movies were consumed at video rental outlets and music stores — which paid local property taxes, potentially paired with municipal sales taxes and other brick-and-mortar duties. But as online subscription services take over more and more of our music and video budgets, that money ends up disappearing from the traditional municipal tax base. By 2015, the people of Chicago are being entertained by corporations outside of the reach of the city government, leaving it scrambling to make up the difference.

We’ve seen this before, in the case of the “Amazon tax": as consumers shift away from brick-and-mortar stores, brick-and-mortar taxes go into decline. Amazon may sell physical things, but the concept is basically the same.

While Brandom’s point is salient, I can’t help but wonder if there’s another tax spiral being plugged here. This is from the city’s most recent financial analysis:

That’s a decline of almost $60 million over a decade—and over $40 million in two years. Even the reduced figure of $119 million in 2013 made up four percent of corporate fund revenues, not a trivial sum. And wireless accounts, as you can see, haven’t plugged the seemingly terminal decline in landline accounts. As the financial analysis reads (emphasis mine):

The overall decline in revenues was due in part to the continuing reduction in the use of landlines as more customers choose to have only wireless services, and in recent years due also to a decline in the number of wireless accounts as use of online communication services such as Skype or other technologies increases. In addition, federal law exempts most wireless data services, such as mobile broadband, from taxation, and consequently, growth in the market for such wireless services has not resulted in increased telecommunications tax revenues for the City.

That’s a lot of data consumption that can’t be taxed (consider the recent evolution of your cellphone bill and usage in terms of voice versus data). Cable television-tax revenues have actually increased modestly over the past few years (page 150), from $21.4 million in 2009 to $26.2 million in 2013 followed by a recent hike, but the worry at this year’s Internet & Television Expo, held earlier this year in Chicago, was about consumers (like myself) who have cut the cable cord in favor of not just streaming services but over-the-air broadcasts as well. Cord-cutting numbers remain pretty modest, but as pressure mounts to make services like HBO available without a cable subscription, the possibility of a landline-like decline is on the table, and with it a comparative decline in tax revenues.

People seem to be uniformly upset about the cloud taxes—on behalf of both Netflix binge-watchers and companies that rely on subscription databases—but it’s worth considering what taxes are and how that feeds into our immediate reactions to new ones.

When Barack Obama made his immediately infamous statement, “you didn’t build that,” about the importance of taxes to the infrastructure that makes business possible, he embodied a certain justification, a meaning, to taxes. Chicago, for instance, already taxes most of the ways you entertain yourself, whether it’s cable television or movies tickets or music shows. And under the idea of “you didn’t build that,” it makes a certain amount of sense—a venue requires roads and rails to get customers there; plumbing and electricity to make it function; inspectors to ensure the safety of patrons; and so forth.

(From a more redistributive perspective, the city justified raising cable taxes, in part, to fund free public arts performances—stuff to do if you can’t afford cable or the movies. Or, from an urbanist perspective, programming that brings people out into the community rather than encouraging them to stay home.)

But as consumption requires less and less infrastructure, that common justification for taxes starts to fall away, and taxes on local commerce start to stick out like a sore thumb: locally-based live, mass entertainment employs residents, builds community, has spillover effects to other businesses, and attracts visitors and new residents. Netflix doesn’t, or at least doesn’t to remotely the same degree. If so many other forms of entertainment are taxed locally—including cable television—should its competition get a free ride? Chicago seems to be a civic outlier, but many states tax digital consumption, whether purchased or streaming. Washington State and Florida both tax Netflix subscriptions. Deep-red Alabama plans to, beginning October 1.

There’s not a right answer. (This analysis from the Center on Budget and Policy Priorities, jas as an example, recommends taxing digital entertainment while being much more cautious about business-to-business digital services.) As tax revenues rise and fall, bureaucrats and voters look to existing tax structures, and their literal and figurative justifications, to build new tax structures. If taxes are justified on a service as intimately tied to the infrastructure needed to provide it, perhaps those taxes fail; if they’re justified on how those services relate to things that are already taxed, perhaps they’re reasonable. Every new tax comes as a shock, but beyond the shock of the new are older, bigger questions.

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