Amid recent headlines dominated by the Federal Communication Commission’s decision to restore net neutrality and Congress’ seeming inability to reauthorize the FCC’s auctioning authority, Americans can be forgiven if they have not heard much about a growing push to reform the FCC’s Universal Service Fund (USF) by expanding its tax base to include broadband and edge providers.
Increasingly, a chorus of voices has called for change, arguing that declining voice service revenue necessitates a more significant revenue pool to keep the fund afloat.
Unfortunately, while USF reform is sorely needed, not all reform is good reform. Rather than focusing narrowly on identifying new sources of revenue, which will do nothing to fix existing inefficiencies or reduce consumers’ tax burden, lawmakers should focus on a broader, more holistic approach that prioritizes establishing accountability and congressional oversight.
Established by the FCC after the passage of the Telecommunications Act of 1996, the USF is designed to provide Americans with access to affordable telecommunications services. To this end, the FCC operates four federal subsidy programs: high-cost, low-income Lifeline, Rural Health Care, and schools/libraries E-Rate programs — for $9 billionannually. The subsidy programs, in theory, play an essential role in connecting Americans, with particular attention paid to serving rural areas and underserved populations.
Unlike newer programs, which are subject to the congressional appropriations process and standard budget considerations, the USF is funded by taxing a percentage of telecommunication companies’ interstate revenues (think telephone lines, voice-over-internet telephony and mobile voice). Unfortunately, the fee’s percentage has grown significantly over time, rising from less than 10 percent in 2004 to nearly 35 percent today. Consumers are paying more on their monthly landline or wireless phone bills, disproportionately affecting lower-income and older Americans.
At $4.5 billion, the high-cost fund is the largest subsidy paying directly to rural telephone companies, much like corporate welfare. Over the years, some USF support has been going to the mafia and the wealthy.
It’s also worth noting that USF programs are notoriously inefficient in helping rural companies in need. One report looked at more than 200 rural telephone companies receiving USF support and found that these companies were already more profitable than larger and midsize companies — collectively, more profitable even before any subsidy was doled out.
Some of these programs are duplicative with other state and federal broadband programs, reinforcing the idea that American tax dollars are not always spent efficiently and that the government continues struggling with program coordination.
For example, the FCC’s Lifeline program, much like the newly created Affordable Connectivity Program (ACP), provides eligible households with a discount on the cost of phones, internet or bundled services. Yet, the ACP has a much better track record of connecting Americans, having enrolled more than 23 million households in two and a half years.
Congress also directly appropriates funding to the ACP, improving transparency and accountability, and ensuring that the program’s long-term viability is not dependent on a diminishing tax base.
Research has also found that USF programs have frequently been the subject of fraud and abuse. For instance, a three-year Government Accountability Office audit of Lifeline found that the program gave more than $1 million in phone subsidies to deceased individuals and 6 million ineligible subscribers. The original goal of this funding was to increase telephone penetration rates. Still, for every 100 subscribers the program subsidizes, it helps only one household that would not have subscribed without the assistance. Meanwhile, inflation-adjusted telephone prices are a fraction of what they were a few decades ago.
Separately, a 2020 GAO investigation of the schools/libraries’ E-Rate program determined that several key fraud risks had persisted over several years, specifically regarding the program’s reliance on “self-certification statements on FCC forms.” In addition, millions of dollars have been paid to the wealthiest counties in America.
What can be done? End duplicative and wasteful programs. Among federal programs, the ACP efficiently uses general funds rather than taxing some consumers to subsidize some consumers. The ACP effectively targets needy consumers, though eligibility requirements could be tightened.
True reform will require Congress to re-evaluate the individual merits of each USF program and its funding. To this end, Sen. Ted Cruz (R-Texas) has published a blueprint for USF reform that, if acted on, would require Congress to address the fund’s “structural problems, re-evaluate its component programs, and get the FCC’s spending under control.”
The ACP program is working by effectively targeting low-income consumers. With that in mind, Congress should start with this blueprint and its eight guiding principles, which make essential suggestions about how best to reform the duplicative USF program. It’s time for Congress to address the elephant in the room and overhaul the USF.