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Cities Want to Tax Streaming Video Services, but They’re Not Sure Why

7 min readBy: Jared Walczak

Keen technophiles may recall that the internet is “a series of tubes” (not a “big truck”), and sometimes those tubes get congested. The late Sen. Ted Stevens (R-AK) fretted about streaming services crowding out other data packets. The analysis is highly technical, but do your best to follow:

“Ten movies streaming across that internet and what happens to your own personal internet? I just the other day got, an internet was sent by my staff at 10 o’clock in the morning on Friday and I got it yesterday [Tuesday]. Why? Because it got tangled up with all these things going on the internet commercially.”

These days it’s municipalities doing the fretting, and their concerns are even less lucid than Sen. Stevens’. A growing number of cities, in red states like Arkansas and Texas, blue states like California and New Jersey, and purple states like Georgia and Nevada, have pursued streaming taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es in recent years, sometimes citing the sheer amount of data used by streamers as justification.

Here’s the thing: Stevens wasn’t wrong about everything. There are worse ways to conceptualize the internet than as a series of tubes, and the enormous growth of data usage has put a strain on communications infrastructure.

According to an industry report, U.S. broadband users averaged 587 GB of data per month at the end of 2022, up from a mere 9 GB in 2010. A separate industry report finds that video accounts for 74 percent of internet traffic in the Americas, compared to 3 percent for web browsing. Netflix, YouTube, Disney+, Prime Video, and Hulu alone were responsible for almost 46 percent of data traffic in the Americas. (If the analysis were limited to the U.S., the figures might well be higher.)

Why this is a taxable concern, however, is not clear. There are a few jurisdictions with municipal broadband, but they charge users for their connectivity just like private providers do. And the cities that want to tax streaming services aren’t the ones maintaining their own fiber networks. Sometimes they justify streaming taxes as a charge for the use of public rights-of-way (akin to the authority to use land for roads, railroad tracks, and utility lines, an unconvincing argument when applied to streaming services), and other times there’s little effort at justification, merely a case of “if it moves (or streams), tax it.”

And when there’s seemingly no local authority to impose such a tax, some jurisdictions get creative. East St. Louis, Illinois, is currently advancing a particularly novel argument in court: streaming video is trespassing within its city limits. Elsewhere, including in many California cities, local governments contend that streaming services are a “utility” and subject to the same sort of taxes imposed on electric and telephone companies which, of course, rely on lines that run through public and private property and take advantage of governmental powers of eminent domain.

Streaming video might take advantage of the lines the cable company laid, but the cable company is already paying for the privilege of using those public rights-of-way.

When you shop at the grocery store, everything you buy got there somehow, presumably by some combination of ship, train, and truck. That truck—whether for the last mile or the whole journey—not only used public right-of-way, but publicly-maintained roads. For this privilege, the shipper pays diesel taxes and tolls. It would make very little sense if, on top of this, either the grocer or the consumer were forced to pay an additional transportation tax. And it would make even less sense if a transportation tax was imposed on snack foods but not on meat or produce, or vice versa.

The same logic applies to companies generating data traffic. That web traffic flows through cables that enjoy public right-of-way, and the owners of that fiber or coax pay right-of-way taxes. Should data congestion reach a point where additional lines need to be run, then additional taxes will be owed. But charging fees on specific types of data transmitted through those lines—and then only when they’re served to people in the jurisdiction—doesn’t make much sense.

Perhaps it was never intended to. Localities are trying to shoehorn streaming taxes into buckets like “utility tax” or “right-of-way tax” because they have existing authority to levy those sorts of taxes and don’t need to go to state lawmakers or voters to secure new taxing authority to impose the new tax. Even better from the perspective of some city officials, if they can argue that streaming services are already a public utility or a right-of-way user under existing definitions, they might be able to tax them administratively, without elected officials even taking a vote.

The result is bad tax policy. Not only is it, by definition, levied under the wrong tax, but there’s also no compelling reason to impose such a tax in the first place.

Excise taxes and fees are supposed to function either as a user-pays system (think of the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. , a restaurant inspection fee, or a properly limited right-of-way tax) or as a way of capturing negative externalities (for instance, a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. ). In practice, lawmakers often adopt excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es to curb activity for reasons other than negative externalities as well (sometimes to add weight to negative internalities), and we usually call these “sin taxes.” There are, for instance, clear societal costs of smoking, drinking, and gambling, but rates are often set well above any reasonable estimate of these social costs, in part to deter an activity for the perceived benefit of those who would otherwise engage in it. This sort of social engineering is not a great use of the tax code, but it’s common.

Do any of these rationales apply to streaming taxes? Not really.

What is the cost to government or society of data utilization? Bumping up against the capacity of existing infrastructure? If so, that’s surely a “problem” for internet service providers, not for government, and if it results in additional infrastructure being built, then additional right-of-way taxes will be paid. Whatever externalities are in play are already subject to the appropriate tax.

Perhaps lawmakers think that watching too much television is rotting our brains. Even if we’re willing to consider government intervention to get us all to watch less TV—probably not something most of us want from government—this doesn’t do the trick. The tax is an ad valorem charge on subscriptions, falling equally on occasional and binge-watchers alike.

Justifications are hard to come by. It seems that policymakers looked at streaming services and thought “I’ll bet we could tax that,” without bothering to come up with a compelling rationale. Of course, these subscriptions are personal consumption, and it’s perfectly legitimate to include them in the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . An additional layer of tax on a specific activity requires justification, however, and no good explanation has been forthcoming.

In California right now, cities are amending definitions of utilities (at least they’re taking a vote?) to tax streaming services like electric utilities. And in East St. Louis, Illinois, policymakers tried to force the new levy into the city’s right-of-way tax. When a court struck this down, they appealed, reiterating their claim that streaming services are “trespassing” on city property by providing services to residents, and, having “committed the tort of trespass by entering on a City’s land without permission, invitation, or other right,” should have to pay a tax (one that is otherwise prohibited by law, according to the courts) to receive an invitation.

This makes no sense. It’s also alarming from a civil liberties standpoint, since the city is claiming that it gets to decide what information is allowed to travel electronically into the city and reach city residents. And constitutionally, it’s an affront to the right of interstate commerce.

Elsewhere in Illinois, Chicago is already taxing streaming under its amusement tax, which was designed for sporting events, concerts, and other live cultural performances and large-scale gatherings that require city resources like directing traffic and providing additional security.

Whether localities insist that streamers are using their right-of-way, providing amusements akin to a live performance, or acting as a public utility, it’s clear that the logic of the excise tax is taking a back seat to the desire to tax some widely subscribed service at a uniquely high rate. States that don’t yet include streaming services in their sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. bases should feel free to add them, but singling out streaming services for a special excise tax is bad policy, and trying to do it through these dubious backdoor approaches adds insult to injury.

Seriously, cities: let people watch their Netflix in peace.