howardnlby Howard Stephenson
The original plan by eighteen Utah cities to get into the business of business by creating “utopian” fiber-optic networks with taxpayer backing has now dwindled to eleven participating cities. In a recent meeting of UTOPIA participants, it was decided that the first phase will require the financial participation of all eleven cities but will be built in only one — as yet undisclosed — municipality. In other words, the taxpayers in all of the communities will guarantee the installation and operation of fiber optic network in just one of the cities.

And they say Utah doesn’t have a lottery!

Specifically, the current plan for UTOPIA calls for the eventual build-out in all cities to occur in three phases. The first phase will be a $25 million pilot program to test the take rate and construction cost assumptions. It will be built in one city. All eleven cities will be expected to pledge 20% of their original pledge amount to back the bonds for seventeen years for this one-city project. UTOPIA concedes that this first phase will not be “self-sustaining”. This is probably because fixed overhead costs will be spread over too few customers.

UTOPIA is billing the first phase as a “conservative” approach (a small piece first in order to test assumptions). UTOPIA is hoping that the results from 1A will enable them to get lower interest rates on subsequent phases.

As far as we know, this is a first for cities to be backing bonds to build infrastructure in cities other than their own. Eleven cities are being asked to commit $2 million per year for seventeen years for a project in one city. Since the first phase has been described as not “self-sustaining”, this suggests that the cities’ pledges will be automatically exercised if UTOPIA decides or is unable to proceed to the second phase.

UTOPIA won’t announce where the first phase will be built. So, in addition to building a telecommunications network in someone else’s city, taxpayers do not even get to find out which city that is.

UTOPIA vs. Taxpayers Association

UTOPIA supporters recently responded to the Utah Taxpayers Association’s counterproposal to

the UTOPIA project. The Association’s counterproposal, which suggests using tax incentives to expand broadband speeds and availability, was printed in several newspapers.

UTOPIA supporters’ responses to this proposal were completely inaccurate and misleading. Here is a sample of their erroneous comments.

UTOPIA supporters wrote: “[UTA] continues to mislead by insisting that no taxes will be paid by UTOPIA.”

This is incorrect. The Utah Taxpayers Association’s April newsletter was very specific in pointing out which taxes UTOPIA would not pay but would be paid by UTOPIA competitors. Those taxes are sales taxes on equipment purchases, property taxes on infrastructure, and income taxes on UTOPIA profits (assuming UTOPIA is profitable, which is highly unlikely). Utah’s private sector telecommunications companies pay $70 million annually in these taxes. UTOPIA’s private sector providers may buy some equipment for their own use to interface into the UTOPIA network, but the lion’s share of equipment will be purchased by UTOPIA directly, and these purchases will be tax exempt.

Except for the comparatively minor, if any, direct equipment purchases made by UTOPIA’s private sector providers, neither UTOPIA nor its private sector providers nor its customers will be paying or collecting any property taxes on infrastructure or sales taxes on equipment purchases.

UTOPIA supporters attempt to skirt this issue with spin and distortion, which demonstrates their unwillingness to acknowledge fundamental tax policy questions.

UTOPIA supporters wrote: “. . . 100% of subscription fees paid [by] business and residential customers connected to the UTOPIA network will be collected by private service providers, every one of which will be subject to exactly the same property, income, and sales taxes as are Comcast, XO, etc.”

This type of reasoning would never stand up in a court of law, a Revenue and Taxation Committee hearing at the legislature, or a hearing at the Utah State Tax Commission. While it is true that UTOPIA’s private sector providers are subject to tax and will collect taxes from users, UTOPIA’s own infrastructure and equipment purchases are not subject to taxes, and this is the point we have been making all along. Just because some taxes are paid is no excuse to ignore those taxes that are not paid, such as property taxes on infrastructure and sales taxes on equipment purchases, especially if those unpaid taxes give UTOPIA a competitive advantage over their competitors.

UTOPIA supporters mention your Association’s proposal to eliminate sales taxes on business inputs and use this as justification for not collecting these taxes on UTOPIA equipment purchases. Interestingly, UTOPIA supporters do not seem inclined to extend sales tax or property tax exemptions to their private sector competitors. UTOPIA likes to malign Qwest and Comcast, but UTOPIA supporters are completely unwilling to compete on a level playing field or acknowledge that UTOPIA has significant tax advantages compared to their private sector competitors.

Extending these same exemptions to the private sector in order to expand the existing $3 billion telecommunications infrastructure in Utah, which includes thousands of miles of fiber, makes more sense than walking away from this existing infrastructure and continuing with the high risk UTOPIA project, which at this point has no existing infrastructure. Since UTOPIA will not be paying these infrastructure taxes, then extending these exemptions to the private sector will not adversely impact state and local governments when UTOPIA is used as the basis for comparison.

Regarding the Taxpayers Asssoication’s assertion that UTOPIA is a risky project as evidenced by Wall Street’s demand for a 12% interest rate on unsecured UTOPIA debt, UTOPIA supporters wrote “… at no time was a 12% interest rate quoted by any investor.”

However, UTOPIA’s own Paul Morris has publicly and privately stated on several occasions that without taxpayer guarantees, Wall Street would insist on a 12% interest rate on unsecured UTOPIA debt. In fact, The Salt Lake Tribune covered this issue on November 18, 2003. “With taxpayer guarantees in place, UTOPIA will only have to pay 6 percent interest on its bonds rather than the 12 percent investors would demand without the cities’ backing,” said Paul Morris, UTOPIA executive director. “If we tried to do it [build the network] at 12 percent, it just wouldn’t be feasible.”

UTOPIA supporters wrote “Entirely private funding was and remains available, provided that UTOPIA cities are willing to give up on 100% coverage, and on complete openness to private service providers. Neither concession was acceptable, so modest taxpayer guarantees were judged to be a reasonable alternative…”

This is irrelevant since the concessions weren’t acceptable which means that Wall Street considers the UTOPIA project a high risk if partial taxpayer backing is not provided.

Salt Lake City Mayor Rocky Anderson probably said it best, “I think asking cities to back the project with city funds is a scam on taxpayers. To think that anybody can predict what the subscription rates of a telecommunications network will be over 20 years is ridiculous. To leave taxpayers at risk like that is unconscionable.”