Tax Burden on Subscribers

As noted above, PEG channels have traditionally been financed by franchise fees or dedicated PEG fees, which are assessed as a percentage of the cable system's gross revenue and justified based on the local government providing rights of way in a community. The basic concept appears to be that in exchange for access to a public asset (the rights-of-way), cable systems should fund PEG channels as a public good.

A current lawsuit in Michigan illustrates how a local community looks at PEG channels as public goods and the PEG fee as a tax. The city of Saline recently sued Comcast over whether Comcast should pay a 2 percent PEG fee under the current franchise agreement. According to WWJ Newsradio 950 of Southfield, Mich., Saline officials stated that they would use the revenues from the PEG fee to pay down debt the Saline Area School District incurred when building a video studio as part of a new high school.[33] In other words, the PEG fee revenue sought by the city from Comcast would be used to pay for school building expenses that otherwise would be funded by a local millage.

Both the 5 percent franchise fee, which is used for local government's general expenditures, and the 2 percent authorized PEG fee are effectively taxes on cable systems. This point was made at a recent local government meeting in Holland Township, where the sponsor of a proposal to provide additional funding for a public access channel noted that the general 5 percent franchise fees were originally designed to be used for cable-related expenses, such as public, educational, and government channels, but most municipalities put their fees back into their general funds.[34]

Separate PEG taxes like the one sought by the city of Saline are still relatively rare in Michigan, and the Holland Township model of relying only on the 5 percent franchise fee is more typical. According to the Michigan Cable Telecommunications Association, only about 20 local governments in Michigan charge a 2 percent PEG fee, and more than 90 percent do not charge any fee, relying instead on the 5 percent general fee and other revenue sources to fund PEG operations.[35] The MCTA calculates that a shift by municipalities to a 2 percent PEG fee could cost cable subscribers $34 million per year in addition to an estimated $80 million currently paid in cable taxes to local governments.[36]

This computation of $34 million in costs to cable subscribers appears to assume that all of the possible PEG fee increases would be passed onto the consumer.[*] Depending on marketplace conditions, however, some of the fee increase might be paid out of the cable companies' profits instead.

To the extent a substantial portion of PEG fees would be borne by consumers, cable television subscribers would be paying many millions of dollars annually in addition to the tens of millions they already pay in cable taxes. While local governments would have to use the revenues as "support for the cost of public, education, and government access facilities and services,"[37] this still is a collection of money by local governments, and the PEG fees are just another form of taxation. This new tax on cable services would be coming at a time when many cable subscribers already feel that costs are high, and at a time when Michigan is being hard-hit by the economic slowdown.

[*] The estimate may also assume that no cable customers would drop their cable service in response to the price hike. Some might, however, a possibility discussed below.