California Must Make a Choice: Accept Federal Broadband Subsidies OR Needlessly Mandate "Net Neutrality"

In a Perspectives from FSF Scholars published on Friday, Free State Foundation President Randolph May noted with concern that, in light of the midterm election results, "there are likely to be renewed efforts to impose net neutrality, or net neutrality-like, mandates on ISPs" at both the federal and state levels. Even before Democrats take control of Congress in January, however, a state net neutrality law sits squarely in the spotlight.

For that you can thank the brazen attempt by the California Public Utilities Commission (CPUC) to have its $1.4 billion Broadband Equity, Access, and Deployment (BEAD) Program funding cake and eat its rejected regulations, too.

A little background may be beneficial. In 2017, the FCC restored the longstanding classification of broadband Internet access service as a lightly regulated Title I "information service" and repealed the so-called "net neutrality" rules adopted two years prior.

The following year, California responded by enacting the California Internet Consumer Protection and Net Neutrality Act of 2018, legislation that revived the FCC's prohibitions on blocking or throttling Internet traffic and engaging in paid prioritization – and then went even further, restricting zero-rating practices and meddling with interconnection agreements.

Free State Foundation scholars argued at the time that, among other deficiencies, California's law was preempted by the FCC's 2017 Restoring Internet Freedom Order referenced above. After an adverse ruling by the Ninth Circuit Court of Appeals, however, broadband ISPs dropped their legal challenge in May 2022. The law remains on the books today.

While all of that was happening, Congress created the $42.45 billion BEAD Program, a once-in-a-lifetime undertaking intended to connect every location not yet served by private ISPs. 2021's Infrastructure Investment and Jobs Act (IIJA) put NTIA in charge, and the first iteration of rules exceeded legislative intent in numerous regards.

Among them, as Duke University economist and FSF Board of Academic Advisors member Michelle Connolly highlighted in an October 2022 Perspectives, were provisions designed to "reintroduce aspects of previous net neutrality restrictions that, in effect, amount to indirect rate regulation."

This despite the unambiguous directive in the IIJA that "[n]othing in this title may be construed to authorize the Assistant Secretary or the National Telecommunications and Information Administration to regulate the rates charged for broadband service."

Fortunately, however, current Assistant Secretary of Commerce and NTIA Administrator Arielle Roth has returned the BEAD Program to its intended path. As I noted in a contemporaneous post to the FSF Blog, she announced to an audience at the Hudson Institute in October 2025 that "any state receiving BEAD funds must exempt BEAD providers throughout their state footprint, from broadband-specific economic regulations, such as price regulation and net neutrality."

NTIA subsequently memorialized that policy in what is referred to as "Condition 50," pursuant to which a state accepting BEAD Program funding must commit that it "will not enforce any law, regulation, order, contracting requirement, or other enforceable obligation that directly or indirectly regulates the rates, terms, and conditions of broadband Internet service" or that "imposes net neutrality rules, open access, or other utility-style rules" on BEAD subgrantees.

After much public discourse (and an extension), California ultimately accepted its $1.4 billion in funding – while at the same time boldly asserting the unilateral authority to reject the net-neutrality strings plainly attached.

In a November 2 letter to Ms. Roth, CPUC President John Reynolds CPUC President John Reynolds characterized Condition 50 as "vague and ambiguous as to its scope and its relationship to … the BEAD statute." He further insisted that the CPUC:

[C]annot be bound by any terms or conditions that are unconstitutional or not authorized by law and it expressly does not waive or concede any arguments or challenges concerning the legality, interpretation, or applicability of any term or condition. Any assurance provided by the CPUC in conjunction with the acceptance of the Notice of Award is intended to be understood with the context provided in this letter.

In response, NTIA spokesperson Stephen Yusko made clear in a statement to CalMatters that "[n]o part of the letter outlining CPUC's concerns is incorporated into or made part of the award."

Thus, the CPUC has a binary choice: abide the strings attached to its BEAD Program funding award OR enforce its misguided net neutrality statute. Its letter claiming it can have it both ways is too clever by half.

FCC's Expected Preemption of California's COLR Requirements Is Welcome

By Randolph May

Communications Daily and Policyband are reporting welcome news from FCC Chairman Brendan Carr. Chairman Carr is circulating a proposed order to preempt California's Carrier of Last Resort (COLR) rules if they have the effect of blocking or delaying a provider’s attempt to retire copper wire telephone service after the provider has received FCC approval.

The FCC said: “If adopted, the order would preempt specific regulations to the extent that they are expressly preempted by section 214 or, alternatively, that their enforcement conflicts with discontinuances approved by the Commission under the federal discontinuance framework established by section 214.” 

California's COLR mandates – and those in other states – are a regulatory relic from a bygone monopolistic telecom era that now only serve to impede much-needed network modernization efforts that are crucial to furthering overall consumer welfare and the nation's economy, and national security too. Retirement of legacy copper wire networks allows providers to invest in IP digital networks that make available advanced broadband services. The FCC has made clear that it will not preempt state COLR mandates unless consumers have comparable services available in their area. In today's competitive environment, comparable alternatives are almost universally available.

As long as alternatives are available to consumers, Free State Foundation scholars have long supported efforts by AT&T in California, and carriers in other jurisdictions, to have the FCC preempt COLR requirements that impede network modernization plans by requiring carriers to maintain legacy copper wire offerings, including FSF's comments and reply comments.

The news that the FCC may act soon is welcome and will be an important component of its Build America Agenda.       

California Dreamin' Up Roadblocks to Progress

 I still love to listen to the Mamas and the Papas singing California Dreamin' as much as the next person. But I confess I do tire of many of California's policies which, if not by intent, then at least by design, are obstacles to progress. 

A case  of obstruction in point: The lengths California appears willing to go to impede modernization of the nation's telecommunications networks.

 

With the build-out of data centers and rapid advent and use of AI platforms, the incredible growth in 5G (and coming 6G) wireless services, deployment of drones, and myriad other technological developments, there shouldn't be much debate that it is in the nation's interest to facilitate the ongoing modernization of its telecommunications networks. And, in many quarters of the country, there is widespread agreement on this point.

 

But – shock, shock! – then there is California. The state is willing to go to extraordinary lengths to thwart the FCC's policies which are intended to allow telecom providers to invest in modernizing their networks by upgrading to digital (IP) technologies while, at the same time, protecting consumers during a transition period away from legacy copper lines.

 

For much longer than should be necessary, AT&T has been battling California's attempt to thwart its network modernization efforts as the state attempts to use its outdated "Carrier of Last Resort" (COLR) regulations to prevent AT&T from discontinuing POTS ("plain old telephone") copper line-based service. It is doing this in places where consumers have comparable IP-based alternatives available. By requiring that legacy copper-based POTS services continue to be maintained in place, this necessarily means that AT&T has less funds available for upgrading and modernizing its network to offer IP-based services over advanced broadband networks.

 

Here at FSF, we have vigorously supported the FCC's various efforts to revise its policies to facilitate network modernization, including the agency's Accelerating Network Modernization decisions. And we recently filed commentsand reply comments in the FCC's current proceeding considering AT&T's request for the agency to preempt California's COLR regulations.

 

In short, California is running a shell game in which, in theory, it purports to allow carriers like AT&T to discontinue copper-based legacy services if comparable basic services are available to consumers over any technology. But even though California claims its policy is "technology neutral," as FSF explained in its reply comments supporting AT&T's preemption request, the reality is much different.

 

[The California PUC] wrongly clings to the fiction that 'California does not require carriers to maintain copper facilities,' a claim belied in practice. The CPUC's convoluted, multilayered definition of 'basic service' effectively requires a copper line network; no other carrier is willing to step into AT&T's COLR shoes, and understandably so; ergo AT&T cannot retire its copper line network even with FCC approval to do so.

 

The FCC recognized in its Network Modernization Order that it's time for practical realities to prevail over fictions that impede IP-based network modernization efforts able to benefit all of California's consumers. As Free State Foundation scholars have long suggested, in today's multi-platform competitive communications marketplace, the whole notion of a 'carrier of last resort' is a fiction that needs to be buried.

 

AT&T has been forced to file a lawsuit in federal court seeking to prevent California, contrary to the FCC's network modernization policies, from requiring AT&T to continue offering copper-based POTS. As AT&T explains in its latest pleading, California continues its intransigence under the color of its COLR regime.

 

Congress gave the FCC the exclusive authority to authorize these service changes. So under the Supremacy Clause, California cannot undo or add to AT&T’s federal approvals. California disclaims doing so. It insists that its rules are technology neutral' and that AT&T is free to stop offering POTS to new customers (what the FCC calls 'grandfathering') and ultimately to discontinue POTS. As a result, California says, there is no conflicting state regulation for federal law to preempt and accordingly nothing for this Court to decide.

 

But California’s insistence that AT&T may wind down POTS is paired with a series of punishing caveats. AT&T may retire POTS so long as it gets several state permissions first—permissions that California insists are merely ministerial but are anything but. AT&T may retire POTS so long as it offers an alternative under California standards that are more onerous than the federal standards. AT&T may retire POTS so long as it substitutes a different service with features that the CPUC concedes are obsolete, and that AT&T’s modern services do not offer. AT&T may retire POTS so long as it tariffs the replacement, which federal law forbids. Scratch the surface, and none of these conditions is truly neutral. Together, they are a mandate to keep providing a service that the FCC has authorized AT&T to stop.

 

Let's hope AT&T prevails. Not just for the sake of AT&T. Not just for the sake of California's consumers who will benefit from modernization of AT&T's telecommunications facilities in California by virtue of access to advanced services. But also, more broadly, for the sake of preserving the FCC's network modernization policies, including the exercise of its preemption authority, throughout the nation.

CTIA Study: Wired and Fixed Wireless Broadband Do Directly Compete

At every opportunity – in blog posts, Perspectives from FSF Scholars, and comments filed with the FCC – Free State Foundation scholars (me included) make the case that 5G fixed wireless access (FWA), and wireless broadband generally, directly compete with traditional fixed offerings, primarily cable and fiber. A recent report commissioned by CTIA provides evidentiary support for that assertion.

"The Impact of 5G Fixed Wireless Access Entry on Competition in the U.S. Residential Broadband Market," released on October 8, concludes that, from a policy perspective, "analyses of broadband competition, whether in merger review, the FCC's mandated competition reports, or states' broadband planning, should treat fixed wireless as a full competitor."

This aligns neatly with the following point FSF President Randolph May and I made in comments filed in the 2026 Communications Marketplace proceeding:

Regarding the IP-based distribution platform – that is, Internet access – it certainly is time for government writ large to acknowledge what individual consumers long have accepted as a given: that, for in-home service, providers of "fixed broadband services," "mobile wireless services," and "satellite communications services" (differentiating terms of art employed in the Public Notice) in fact are fungible services that compete head-on for customers.

Section 4.3 of the 2023 Merger Guidelines states that, in identifying a relevant antitrust market, the FTC and the Department of Justice "may rely on … evidence on observed market characteristics ('practical indicia'), such as … sensitivity to price changes."

The report provides precisely such evidence, finding that "[i]n local markets where T-Mobile, AT&T, or Verizon launched 5G fixed wireless home internet, cable broadband prices were approximately 12 percent lower than the estimated counterfactual price – what prices would have been absent FWA entry."

To be sure, the broadband marketplace is dynamic, and the report should not be taken to mean that 5G fixed wireless access is superior to other distribution technologies: cable, fiber, low-Earth orbit satellite, and others, each with their own unique set of advantages and disadvantages. Nor should the report be interpreted as concluding that FWA will – or should – win out in the marketplace.

Rather, it should be viewed as a source of further evidence that consumers are able to choose from a wide range of robust options, both wired and wireless – and that, as a consequence, there is a compelling justification for policymakers to eliminate regulations that discourage investment and innovation.

Nationwide, 29% of Your Wireless Bill Composed of Taxes – 32% for Marylanders

The Tax Foundation released its annual report on wireless taxes on September 28: Federal Surcharge Drives Another Increase in Wireless Taxes and Fees in 2026. Nationally, it found a record high for taxes on wireless services in 2026: 28.8% of monthly wireless cell phone bills go to taxes.

The national increase in 2026 from the previous year was driven in large part by an increase in the federal Universal Service Fund “contribution fee” (essentially a tax) and, in smaller part, driven by a small increase in state and local taxes. Federal USF taxes on wireless revenue that are passed on to consumers now make up 14.39% of monthly wireless bills in each state, up from 13.26% in 2025. On average, state and local taxes make up another 14.42%, up from 14.25% in 2025.

In 2026, Maryland ranks as the 10th highest-taxed state for wireless services. That means Marylanders pay more in wireless taxes than residents of 40 other states and the District of Columbia. Specifically, 31.98% – nearly one third – of a typical Marylander’s monthly wireless bill goes to taxes, compared with the national average of about 29%. (The Tax Foundation calculates these figures as estimates for typical wireless customers; individuals’ actual effective rates vary by factors like plan type and number of lines.)

Unfortunately, the rising federal and state taxes mean that consumers can’t fully capture savings from the steady decline in wireless prices over the last couple of decades. CTIA, the wireless industry association, reported in April that “prices for unlimited service plans declined by more than 10% last year alone and are down 35% over the last five years,” even as network quality and speeds improve. Meanwhile, taxes climbed from 16.2% to 28.8% of a monthly bill over the past two decades, according to the Tax Foundation report.

Making matters worse, much of what wireless consumers pay in effective taxes is poorly spent or misallocated. Federal and state taxes raise the cost of wireless service, which reduces consumer demand and discourages infrastructure investment. On the federal side, the taxes fund the outdated and inefficient Universal Service Fund. Congress created the program to expand telecommunications access, but the marketplace has changed dramatically since the program’s origins in 1996. The result is a structure that produces messy and backwards industrial policy. (Read more here and here.) Many states also have their own telecom subsidy programs.

Federal and state governments should stop extracting so much money from wireless consumers, especially since these taxes hit low-income households hardest. Rather than taxing wireless to fund government-run subsidy systems, Congress – and states with similar programs – should allow wireless and other telecom service providers to decide how best to invest in their networks and serve their customers.

Maryland’s Misguided Digital Ad Tax: The Fight Continues in Trial Court

The Maryland Attorney General is appealing the Maryland Tax Court’s decision last month that struck down the state’s digital advertising tax. The first-of-its-kind law continues to draw national attention as other statehouses consider what the legal battle means for their own digital ad tax proposals. I covered the Tax Court ruling and similar nationwide legislation in a post last month.

It’s unfortunate, though perhaps not surprising, that the state has chosen to continue spending public funds on this litigation. I’m hopeful that the new venue – the state trial court – will affirm the Tax Court’s decision. A ruling that upholds the tax not only would harm Maryland consumers and the state's economy, but it would encourage more digital ad taxes across the nation. This risks reshaping the Internet’s advertising-supported model for the worse.

Ads play a central role in the modern Internet and broader economy, as they make up a significant portion of Internet traffic. Targeted advertising involves a set of voluntary exchanges that support the modern Web: businesses pay for targeted ads to reach consumers, and people share information with advertising companies in return for accessing websites without charge.

Taxes on digital advertising would mean fewer ads, as basic economics explains. In search for lost ad revenue, websites would likely create paywalls, turn to donations, or raise prices for their products, or combinations of these. All these costs would hit everyday working people hard, especially those with low incomes.

Many supporters of digital ad taxes have the picture backwards and instead see targeted advertising as a social ill. In Maryland, Senate President Bill Ferguson described basing the tax legislation on economist Paul Romer’s idea to curb targeted advertising by taxing it. Romer would instead like to see a subscription-driven Internet where website visitors pay to access content or donate to the website.

A general antipathy towards “big tech” started the push for digital ad taxes (which I discussed last month). As Maryland looked for ways to raise revenue amid massive education spending and budget challenges, legislators knew that taxes on companies like Meta and Google would likely be popular with the public. Similar tax legislation then began appearing in other statehouses trying to raise state revenue.

Fortunately, Maryland’s digital ad tax is on shaky grounds at best, a signal to other states that they may face similar challenges with their laws. In Maryland, the tax’s weak legal standing was clear from the start. Free State Foundation scholars predicted back in 2020 that the tax would not survive judicial scrutiny.

The Maryland Tax Court’s ruling last month determined that the tax violates the federal Internet Tax Freedom Act (ITFA) and the Constitution’s dormant Commerce Clause and Due Process Clause: under ITFA, the tax discriminates on digital advertising by exempting print and broadcast ad sales; it violates the dormant Commerce Clause by levying a local tax structure based on global revenue; and it violates the Fourteenth Amendment’s Due Process Clause by discriminating against out-of-state companies.

A reversal of the Maryland Tax Court ruling would begin to unwind the set of voluntary exchanges that support the modern Web. Taxes on digital advertising would make life more expensive for everyday consumers. I’m optimistic that the trial court will affirm the Tax Court’s decision and discourage other states from following the same path.

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.