San Diego sees diminishing tax revenues due to cord-cutting trend

San Diego is seeing lower tax revenues from cable franchise fees.

San Diego, the eighth most populous city in the United States, is the largest to report that the small but accelerating cord-cutting trend has had a noticeable effect on tax revenues.

The latest projection on cord-cutting, from eMarketer in September, is that over 22 million people will have dropped their cable subscriptions by the end of this year (the company previously predicted only 15.4 million). The trend is compounded by the 34.4 million mostly young people who have never subscribed to cable. There are still 196 million pay-TV subscribers.

Franchise agreements vary from city to city, and may include everything from pole-attachment fees to rights-of-way, and many if not most factor in the number of subscribers. Meanwhile, every local government is going to have a unique set of circumstances that will also include varying rates of population growth or decline, different economic conditions, and local preferences for everything, including video subscribership.

In San Diego, the diminishing franchise fees that are the natural consequence of increased cord-cutting have grown large enough to remark upon, but not large enough to force budget cuts because overall tax revenue is increasing due to growth in the overall economy, reports the San Diego Union-Tribune. An economic downturn would expose the hole in the budget left by cord-cutting, however, the paper reports.

There appears to be no clearinghouse for information on the interplay of cord-cutting, franchise fees, and local government revenues. The amount that cable operators pay in overall franchise fees is a line-item in their financial reports, and the largest cable operators report they’re paying steadily increasing amounts in franchise fees.

The amount of fees Comcast, for example, has been paying, have been rising, according to a Comcast spokesman, who said the figure was $1.38 billion in 2015, and $1.48 billion in 2016. Comcast has not reported full-year results from 2017 yet, but through three quarters the company is on a pace to pay more in franchise fees than it did the year before.

Charter Communications, meanwhile, reported that franchise fees and other franchise-related costs grew from $208 million in 2014 to $212 million in 2015 to $534 million in 2016 (the company purchased Time Warner Cable and Bright House last year). Charter has the franchise in San Diego; the company was unable to respond to an inquiry by press time.

In short, the indication is that cord-cutting leading to significant reductions in franchise fees is probably still a spot phenomenon.

That said, local governments across the country are clearly aware of the potential (if not the actuality) of diminishing franchise fee revenues, and are looking at other options. One plan under consideration by many is adopting taxes on streaming video services.

Chicago, Pennsylvania, and Florida have passed so-called Netflix taxes, noted USA Today. Pasadena, California, and Newport News and Hampton in Virginia, are considering doing likewise. The California state legislature, meanwhile, is considering a bill to bar the practice of taxing streaming video.

It is important to note that local governments face other revenue pressures that have nothing to do with cord-cutting or franchise fees that might also play into their interest in taxing streaming video services. For example, growth in sales tax revenue in recent years has been slowing, according to the Rockefeller Institute of Government at the State University of New York.