Congressional Reform Is More Urgent Than Ever as the USF Tax Rate Shoots to 42%

The tax that telecommunications service providers pay to fund the Universal Service Fund reached yet another all-time record high of 42% in the fourth quarter of 2026, up from 38.8% in the previous quarter.

The USF and its so-called “contribution factor” – effectively a tax, which funds the program – have long been the subject of bipartisan calls for reform. The tax funding mechanism is backwards and outdated. If the USF was created today, few would suggest the current structure – that traditional telecom services should subsidize broadband.

Traditional telecom services are a shrinking tax base that the USF’s funding structure dooms to an ever-climbing tax rate, unless Congress steps in. Case in point: the chart below illustrates how much greater the 42% tax rate is today than it was at its humble origins of 5.7% in the second quarter of 2000. 

 

The Universal Service Fund Working Group, a bicameral, bipartisan group of legislators was formed largely to address the shrinking tax base and has reportedly made progress drafting a major USF reform plan. I blogged recently about the draft legislation’s timeline (read here).

The hard part for the working group is the point at which broad consensus on the USF breaks down – what’s the proper alternative to this status quo? Considering today's technological and marketplace realities, what services should the USF fund anyway, and how should the subsidies be funded? Last year, Free State Foundation scholars submitted comments to the USF Working Group explaining just that: get rid of wasteful spending by ending the fund’s redundant High-Cost program; replace the Lifeline program with a voucher system to be used by qualifying low-income persons; and fund the USF via congressional appropriations, among other fixes.

How high does the USF tax need to climb before Congress finally reforms the fund? I remain hopeful that we will see a draft legislative plan by the end of this year.

Price Regulation Is Not the Answer for Broadband

By Randolph May and Joseph Kennedy

 

In a recent blog posting on the Benton Institute’s Digital Beat, Christopher Ali, the Pioneers Chair in Telecommunications at Penn State University, called for consideration of rate regulation for broadband providers. His main argument is that some households still have difficulty paying their Internet bill. That may be true for some in the short-term. However, the best way to ensure lower prices and greater innovation for the most consumers over the long-term remains continued promotion of increased competition with market-determined prices.

There is considerable evidence showing a steady pattern of increasingly faster speeds and lower prices per megabyte per second over the last few years. In other words, on average, consumers are paying less for more broadband capacity. Rate regulation almost certainly would reverse this.

Long periods of telecommunication history in the past were characterized by stagnant prices and low innovation because regulators treated the underlying transmission facilities as fixed assets that could only handle a limited amount of traffic. During this earlier monopolistic era, regulators aimed to guarantee providers a fixed rate of return on their investments and discouraged competition from new technologies.

As Ted Hearn points out in Policyband, Professor Ali does not acknowledge the large number of current market promotions reducing prices. Comcast, for example, is offering 300 Mbps for $40 a month and guaranteeing the price for five years. Mediacom is selling a broadband-mobile bundle, guaranteed for two years. Both are significantly lower than the $78 median monthly bill that Ali cites. It may be that the average user prefers to pay more for more capacity rather than lower fees for less bandwidth. However, federal programs and state universal service subsidies specifically target low-income consumers that may have difficulty paying their bills, along with offerings by individual providers targeting low-income consumers.

Professor Ali also does not mention the growing broadband competition from satellite constellations such as Elon Musk’s Starlink. It and other companies are aggressively targeting new customers with their high-speed broadband offerings, especially those in remote areas where fiber installation is extremely expensive. Price competition from satellites recently helped the National Telecommunications and Information Administration lower the overall cost of its Broadband, Equity, and Access Program by $21 billion. Much of these savings will be poured back into the BEAD program’s efforts to extend broadband to the remaining unserved locations in the country.

As Professor Ali points out, the public debate on price regulation has been more or less settled, at least for now. Over the last several decades, a number of markets thought to be natural monopolies, including those involving freight trains, airlines, electricity transmission, and Ma Bell-era communications facilities have faced fewer regulations and greater competition. Instead of low-risk regulators limiting new sources of competition and innovation, consumers now benefit from new market entrants offering new products and lower prices.

This is certainly not the time to renew efforts at rate regulation as the broadband marketplace becomes ever more competitive. 

NTIA Release of More BEAD Money Properly Targets Deployment

For several months the telecommunications world has speculated on the future of the Broadband, Equity, and Access Deployment Program (BEAD). Congress created the program as part of the Infrastructure Investment and Jobs Act with the purpose of extending broadband coverage to all underserved and unserved communities. Program changes by the Trump Administration reduced expected spending by $21 billion. Since then, the broadband community has been waiting to see whether this money would be spent and for what purposes. Now, commendably, it is good to see that the first guidance on additional spending goes right to the heart of BEAD’s purpose.

On September 3, NTIA issued guidance regarding how some of the money will be allocated. Briefly, the funds will be available for a second round of proposals to extend deployment of broadband to all Americans. This is the proper focus.

 

Although the BEAD program was supposed to allocate enough funds to accomplish this goal several months ago, NTIA anticipates three sources of new locations that still require funding. The first are areas that remain unserved due to defaults in other federal and/or state programs. The second are projects that suffered from misreporting by providers. The final source stems from changes to the Federal Communication Commission’s broadband DATA maps since completion of the final proposals. These locations either suffered from misfortune caused by others or, in the case of the DATA maps, were assumed not to exist.

In its Supplemental Deployment Policy Notice NTIA spells out new procedures that Eligible Entities (States, Territories, and the District of Columbia) can follow to request part of the $21 billion to fill in these remaining unserved areas, hopefully completing BEAD’s purpose: to extend broadband service to all areas of the country. NTIA's new Policy Notice builds on BEAD’s original Notice of Funding Opportunity.

Eligible Entities are expected to provide connectivity to all unserved locations within the constraints of the additional funds. However, additional funds are available in extraordinary circumstances.

It is reassuring that the initial plans for spending the Benefit of the Bargain Savings (the $21 billion) will deal directly with BEAD’s main purpose: completing the spread of broadband to all parts of the country. There may need to be further guidance, however, on how many areas NTIA believes still need to be funded or how much it will cost. Some approved projects have already experienced defaults. Inflation, difficulty obtaining state and local permits, and time constraints will likely result in others.

The procedure for allocating additional funding builds on the original round. NTIA will review the DATA maps to ensure their accuracy in locating additional locations to be served. NTIA will then determine an upper limit of funding to serve these new locations. This amount will be based on the average cost of serving a location and the additional unserved locations. NTIA states that other uses of BEAD will be addressed in subsequent guidance.

EchoStar: Chutzpah in Communications Land

 A classic example used to explain the meaning of the Yiddish term "chutzpah" is the joke about a boy who murders his parents and then begs the judge for mercy because he is an orphan.

 

EchoStar hasn't killed anyone. But its ploy to claim payments from the trust fund the FCC required EchoStar to establish as a condition of its approval of the transfer of EchoStar's spectrum licenses to AT&T and SpaceX certainly qualifies as one of the most egregious acts of chutzpah in Communications Land.

 

The background facts are well-known. When the FCC's Wireless Telecommunications Bureau (WTB) approved EchoStar’s sale of its licenses on May 12, 2026, for tens of billions of dollars, it required EchoStar to set up a trust fund to help pay tower companies and others that helped construct EchoStar's 5G network. While EchoStar was required to build the network as a condition on its licenses, it refused to pay the vendor companies that actually did so.

 

EchoStar has now told a federal bankruptcy court that this fund can be used to pay a loan one EchoStar subsidiary supposedly made to another, a claim so large, according to the WTB, it threatens to "swallow the fund."

 

In a July 30, 2026, order, the WTB firmly rejected EchoStar's act of chutzpah: "We disagree, and clarify what should be obvious – that the fund cannot be used to pay companies that did not build the network. And to ensure that that the purpose of the fund is not perverted, we also modify the fund’s terms to explicitly exclude from payment any claims of EchoStar or its subsidiaries."

 

Never one to give up on a far-fetched gambit – especially one trying to "swallow a fund" meant for the benefit of others – EchoStar has now asked the full Commission, in an August 30 Application for Review, to reverse the Bureau's order. EchoStar contends that, because the agency's order establishing the trust does not explicitly limit the payouts to claims of third parties, it's entitled to take funds from the trust with one hand that it supplied with the other.

 

The Wireless Telecommunications Bureau's July 30 order, to ensure its intent in creating the trust fund is carried out, modifies the definition of a fund claim to exclude any claims on behalf of EchoStar or its subsidiaries or affiliates, or any assignee thereof. The Bureau's July 30 order explains what almost certainly was evident to all when the FCC required that the trust fund be established as a condition of its approval of the transfer of EchoStar's spectrum licenses:

 

"The purpose of requiring EchoStar to create the Fund was to ensure that some of the tens of billions of dollars EchoStar is receiving for its wireless licenses be used to pay those who built the 5G network that EchoStar promised and was required to build as a condition on holding those licenses. That purpose is not realized if EchoStar pays the money to itself (directly or indirectly), or uses it to pay other of its debts or those of its subsidiaries or affiliates."

 

In essence, EchoStar's main argument seems to be that the Administrative Procedure Act prevents the Bureau from clarifying its July 30 order to make crystal-clear, if need be, that the lack of an explicit limitation in the agency's original order creating the trust fund did not mean that EchoStar itself would be able to claim payments from the very trust it funded. I don't think the APA does any such thing.

 

If EchoStar's gambit succeeds, not only would the specific tower and other 5G infrastructure builders for whose benefit the trust fund was established be injured, but, as importantly, the prospect for future network build-outs will be diminished as a result of the lack of confidence that contracts will be honored and that the rule of law will prevail.  

 

I forget what happened to the orphan who, in a show of chutzpah, pleaded with the judge for mercy after killing his parents. But you don't need to be an expert in administrative law or in Yiddish to suspect that, in this instance, EchoStar's exercise of chutzpah in Communications Land will be to no avail.

Maryland’s Digital Ad Tax Struck Down: The Fight Is Likely to Continue

Last week, the Maryland Tax Court struck down the state’s controversial 2020 digital advertising tax on grounds that it violates the Constitution and the federal Internet Tax Freedom Act (ITFA). The ruling on the first-of-its-kind law drew national attention as tech companies, advertisers, and other statehouses watched to see what it might mean for digital product taxes nationwide.

While mounting legal defeats signal trouble for various states’ attempts at digital ad taxes, it's likely states will keep looking for ways to tax and regulate tech. The impetus stems from two key drivers in our current political environment – governments’ persistent urge to tax their way out of their over-spending habits and a growing public antipathy towards large technology companies.

The tax, passed in 2020, applied to companies that sell digital advertising in Maryland, with progressive tax rates from 2.5% to 10% based on company revenue. The Maryland Tax Court ruled on August 14 in favor of challenges filed by Apple, Google, and streaming service Peacock TV. The court – an administrative quasi-judicial agency whose decisions are binding – also ordered the state to refund over half a billion dollars ($536million) it collected since the tax took effect.

The tax court determined that the law violated the Constitution’s dormant Commerce Clause and Due Process Clause as well as ITFA. The tax violates the First Amendment by discriminating against digital advertising and exempting print and broadcast ad sales. The weak legal standing was clear from the start. Free State Foundation scholars predicted back in 2020 that the tax would not survive judicial scrutiny. This ruling also follows last year’s decision in federal appellate court that the tax’s pass-through provision – which prohibited companies from directly passing the tax costs to consumers – violated the First Amendment.

Comptroller of Maryland Brooke Lierman, in response to last week’s ruling, said that she and the Attorney General of Maryland would continue to defend the tax law. This could include possible appeals to the state trial court, where the law could get stuck for a while. Until a final outcome, the state will continue holding the taxes already collected.

These defeats in state tax and federal appellate courts (hopefully) signal trouble for digital ad taxes in other states. Illinois, Utah, and Washington have also passed digital ad taxes. Utah, apparently sensing legal trouble brewing in Maryland, crafted its 2026 digital ad tax law to skirt ITFA violations by avoiding the phrase “digital advertising.” Digital ad taxes are part of a wider push across states to tax digital goods and services. In 2026 alone, 22 states considered proposals to tax digital ad sales, with 12 bills enacted, according to a MultiState analysis.

This growth in digital tax proposals is happening as many states explore ways to tax their way out of their spending problems. Proponents argue they just want to raise revenue and modernize the tax code by taxing newer goods and services. In Maryland’s case, it adopted the tax partly to help fund the state’s massive education plan, which is contributing substantially to unsustainable spending and budget challenges. A MultisSate report describes how Maryland is among many states facing such serious budget issues.

Public antipathy towards large technology companies and targeted advertising is also a major impetus for the wave of digital ad tax proposals. Supporters of Maryland’s tax made clear (here and here) that they wanted the tax to penalize “big tech companies” for “monetiz[ing] personal data for targeted advertising.” Maryland Comptroller Lierman also said in her statement that an appeal would be to “ensure that the country's biggest tech companies pay their fair share.” And of course, digital advertising taxes are among many other regulatory proposals aimed at tech such as age verification, digital privacy, data center moratoriums, and AI regulation.

In this debate about digital ads, “tech giants,” private data, and “taxing the rich,” the tax proponents misunderstand who the real winners are from this ruling – Maryland businesses that buy ads and consumers who receive them. Without the tax, those businesses can afford more ads and pass along savings and better-targeted offers to everyday people – the consumers. And in the voluntary exchange that is the lifeblood of the Internet, people share information in return for free access to websites. Targeted advertising helps people browse websites freely to find the best products and services at the best possible prices, which helps lower-income consumers the most.

Marylanders need another win in the state trial court or, better yet, state surrender. Moreover, states need an approach opposite to what we’ve seen – one that embraces lower taxes and the Internet’s free market-oriented voluntary exchange of information.

PRESS RELEASE: "FSF President Randolph May Applauds the California PUC's Approval of the Charter-Cox Merger"

 

I'm pleased that the California Public Utilities Commission – finally! – approved the proposed Charter-Cox transaction, clearing the way for the merger to be consummated. It's worth remembering that the proposed merger was announced in May 2025. That's a long time ago in today's fast-changing communications marketplace.  

It was easy to see from the get-go that this merger is much more likely than not to be pro-competitive and pro-consumer. This is because Charter and Cox do not compete against each other in any meaningful way in their broadband and video distribution businesses. The reality is that, in today's facilities-based multi-platform communications environment, they each confronted strong broadband and video competitors, whether from fiber providers, wireless companies, broadcasters, satellite operators, and not least, from giant Internet streamers like Netflix, YouTube, Amazon, and so on. Together, the combined Charter and Cox will be a stronger competitor in an indisputably dynamic marketplace – although there are certainly no guarantees for success for any of the market participants.

 

And an important final point: The current merger review process takes longer than it should, and the requirement for individual state approvals – like California's here – is one reason the process is unduly long. This is especially so when states use the transaction review process to extract so-called "voluntary" conditions from the merger applicants before granting approval, even though the conditions often are unrelated to the specifics of the merger.

 

For many years, Free State Foundation scholars have advocated the adoption of reforms to improve the merger review process at both the federal and state levels. There's still work to be done on that score.

California Reward Programs Underscore Gravity of Copper Theft

California, in particular, has a serious problem. Its communications infrastructure is under assault. And high-value copper is the motivator. Fortunately, there is a solution: deregulatory policies that promote the transition to all-IP networks.

Earlier this week in California, Verizon "announced a $25,000 reward program for information leading to the arrest and conviction of individuals involved in vandalism that have cut off thousands of Verizon customers from critical wireless and wireline communications services." AT&T created a similar reward program last August specifically focused on copper-related crime in the Golden State.

Outdated regulations that force providers to maintain legacy copper-based networks incentivize such vandalism and theft. These include California's "Carrier of Last Resort" rules that are the subject of a pending Petition for Preemption and Declaratory Ruling filed by AT&T – and in support of which Free State Foundation President Randolph May and I filed comments and replies.

As Verizon highlighted in its press release, "California is at particular risk for vandalism – when it comes to the economic impact of these outages, the state saw the largest losses at $252.6M." In the petition referenced above, AT&T wrote that in California alone it must "spend $1 billion a year to maintain a nearly-empty copper network that has become an easy mark for criminals" and reported roughly 2,000 outages attributable to copper theft in just the first five months of 2026.

No matter what the form, deregulatory actions that accelerate the migration to all-IP networks – forbearance pursuant to Section 10 in the context of a general rulemaking proceeding (regarding which the Free State Foundation filed comments) or a petition for specific relief, or preemption in response to the petition filed by AT&T in the wake of the FCC's March 2026 Network Modernization Order – help relieve carriers from the obligation to provide thieves with additional helpings of copper (among other pro-consumer benefits).

They also mitigate the need to enlist ordinary citizens in the fight against vandalism and theft through the offering of bounties.

Permitting Reform Remains a Top Priority: BEAD Contractors Need to Obtain Over 86,000 Permits

In order to complete all of the construction projects funded by the $42.45 billion Broadband Equity and Access Deployment (BEAD) program, a new study projects that contractors will have to obtain at least 86,402 permits from a wide range of governing bodies. While some permit processes may go smoothly, others are already imposing significant costs and delays. Moreover, the estimate likely understates the scope of the problem, as the authors made several conservative assumptions in producing the report. Permitting reform is already a significant focus of both Congress and the FCC. It needs to remain a top priority as this report documents.

On August 5, 2026, Broadband Expanded issued a study and summary conducted by Alex Karras and Michael Santorelli to quantify the size of the permitting challenge that contractors face across the nation. They find that “BEAD-funded broadband builds face a broad, multi-jurisdictional permitting burden.” Looking at just the basics, the study covers 2,942,440 BEAD-funded locations within 3,783 projects and 126 federal, state, and local jurisdictions. This produced 6,933 project areas (a match between a single project and a specific permitting jurisdiction) and tries to measure the number of permits each will require. In total the study identifies 86,402 permitting “triggers.” The median project area faces 11 triggers and 8 permitting authorities.

 Who requires these permits? The study assumes that every project area will require at least one permit from each of the counties in which it is located. It also reports that 95.2 percent of project areas trigger a federal environmental review. At the state level, 75.5 percent of project areas require state-level permitting (mainly for highway rights-of-way) and 61.7 percent require municipal permits.

The authors made several conservative assumptions. As a result, the actual number of permits is likely to be significantly greater than projected. These assumptions include:

• Each permitting requirement is only counted once in each project area even though in many cases the jurisdiction may require more than one permit to complete the project.
• Due to data limitations the analysis does not include permits for infrastructure that is not physically close to a served household.
• The study omitted all satellite projects on the assumption that they require no physical plant and therefore do not need permits.
• Features crossed only by fiber or other infrastructure running between premises with no construction are not counted.

Other than counties (which are assumed to apply to all projects), the most common triggers for a permit are wetlands (89.4 percent of projects), flood zones (72.6 percent), interstate, U.S. and state highways (71.6 percent), impaired waters (64.6 percent), and municipal overview (61.7 percent).

Because they touch many projects with different responsibilities, some entities have a larger presence than others. The U.S Army Corps of Engineers covers 89.8 percent of project areas, the Environmental Protection Agency 83.2 percent, and the Federal Emergency Management Agency 72.6 percent. Since federal agencies issue 48.2 percent of all permits, permit reforms in these agencies will have an out-sized impact. The problem is not limited to government authorities. Private parties account for 15.7 percent of permits. Railroads account for 44.3 percent of all projects (as opposed to permits issued). Utilities and pipelines are also significant. 

Harras and Santorelli do a good job of summarizing the basic size of the permitting process. They conclude that “ISPs face a thicket of byzantine permitting processes at the local, state, and federal levels that could slow or derail progress towards meeting BEAD’s goals at scale." Given their assumptions, the figures are likely a lower-bound estimate of the true burden.

The problem is further complicated by the fact that each jurisdiction has its own timetables, requirements, and processes. In addition, the BEAD program contains time limits that contractors must meet once they have received government funding. Finally, many jurisdictions lack the resources to handle a sudden surge in construction. On the upside, the BEAD program currently has $21 billion in unspent funds. Free State Foundation scholars have supported using at least some of these funds to improve the permitting processes that currently delay broadband deployment.