Rural broadband in jeopardy unless Congress fixes taxing problem

Roughly two decades have passed since the phrase “digital divide” was coined to describe the separation between those who have access to the internet and those who don’t. It’s bad enough that more than 21 million Americans in rural communities still live on the wrong side of that divide. It’s even worse that an unintended tax provision is penalizing the very organizations that are taking steps to bridge the gap.

Under the 2017 tax law, if community-based electric co-ops accept government grants to deploy broadband, they could lose their tax-exempt status and be forced to pay back a substantial chunk of that money to the government.

Most of America’s 900-plus electric cooperatives — which are built by and belong to their communities — are recognized as tax-exempt organizations by the IRS so long as they receive no more than 15 percent of their income from non-co-op members.

That means federal, state and local grants to co-ops now count toward that 15-percent threshold. If that limit is exceeded, a co-op loses its tax-exempt status for that year and will be forced to pay taxes on the grant amount. This creates an “existential issue.”

As stewards of America’s rural communities, many electric co-ops work hard to secure grants that allow them to expand broadband access in rural communities. More than 100 electric co-ops are deploying broadband in their service territories. This connectivity serves two key purposes: bridging the digital divide for co-op members and enhancing the network for utility business operations, including the ability to offer energy management technology to homes and businesses.

The recent tax law change leaves them with an unfair choice: accept the broadband grants to help close the digital divide or turn down those grants so they won’t have to spend their members’ money paying taxes rather than improving service.

Otsego Electric Cooperative received $10 million in broadband grants from the state of New York and federal Connect America Funds. This put the co-op well over the 15-percent limit for non-member revenue in 2019. Otsego will lose its tax-exempt status unless the law is changed this year.

Electric co-ops should be able to focus on enhancing the quality of life in their communities without fear of a federal tax bill. It is patently unfair for the government to fund broadband deployment projects with the right hand, only to have the IRS claw back a percentage of that funding with the left.

The convergence of new technology and new partnerships has made rural broadband deployment more achievable than ever. Yet low population density challenges and high costs remain hurdles to successful rural broadband deployment. State and federal grants are an essential tool in the effort to bridge the digital divide.

Based on our conversations with the Treasury Department, congressional action is the only way to address this issue. Fortunately, key lawmakers recognize this is an unintended consequence of the 2017 tax bill and they’re working together toward a solution before it hits home with their rural constituents.

The bipartisan RURAL Act, introduced by Reps. Terri Sewell (D-Ala.) and Adrian Smith (R-Neb.) and Sens. Rob Portman (R-Ohio) and Tina Smith (D-Minn.), will restore certainty and common sense. The bill ensures that co-ops do not jeopardize their tax-exempt status when they accept government grants. And in a political climate dominated by hyper partisanship, the bills enjoy overwhelming bipartisan support.

As co-ops across the nation prepare to apply for the next round of broadband grant funding, relief from this taxing problem can’t come soon enough.

Jim Matheson is CEO of the National Rural Electric Cooperative Association, the national service organization that represents the nation’s more than 900 not-for-profit, consumer-owned electric cooperatives. He previously served seven terms as a U.S. representative from Utah. Follow him on Twitter @NRECAJim