The 13% Phone Tax

On Friday, June 12 (a Friday the 13th would have been more appropriate!), the FCC announced that the tax on all interstate and international phone calls has been increased to 12.9%. While the possibility of implementing new regulations to enforce payment of income taxes for personal calls made from business-provided cell phones has been much in the news in the past few days, not much attention has been paid to the large increase in the "phone tax" levied to support universal service subsidy programs. Attention should be paid.

Just since the beginning of the year, the tax has jumped from under 10% to 13%. (I understand the FCC requires the phone companies to call the tax a "fee" and not a "tax." Tell that one to an economist with a straight face. My habit is to call a skunk a skunk when I encounter one.)

To put the matter bluntly, the time has long since past when the FCC (or Congress) should have radically overhauled the universal service regime. It has been irresponsible not to do so. With respect to the universal service regime, the preferred course seems to be to follow the Detroit model a la GM and Chrysler or what may soon be the California model -- just wait for a financial implosion of monumental proportions before finally cleaning up the mess.

It didn't - maybe still doesn't - have to be this way. Most telcom experts agree that the original mission of the universal service regime -- to make voice telephone service universally available -- was accomplished years ago. The subscriber rate has remained stable at around 95% of American households for over a decade, despite billions of additional subsidy dollars poured into the coffers of mostly rural telephone companies and new wireless competitors. Targeted subsidies are available to low-income persons that need help to get telephone service.

Telephone service is as universally available as it is going to get without the expenditure of further billions in untargeted, unnecessary, and wasteful subsidies that have the effect of inhibiting the development of more efficient and cost-effective technologies, services, and competitors. Last year the FCC Inspector General's report found that 23% of the subsidy payments made directly to phone companies from the "high cost fund" were "erroneous." This amounted to $971 million in estimated erroneous payments.

I have explained what needs to be done to reform the subsidy regime many times before. Here's a piece entitled "The 10% Telephone Tax" from December 2006, and here's one from February 2008, optimistically titled "Universal Service Reform in '08." They have the background information needed to understand why the FCC has been derelict in not acting much earlier to reform the regime.
Note that I point out in these pieces that in the first quarter of 2002 the phone tax was "just" 6.8%. Now it is almost double that.

After watching the FCC delay taking action for years, it may be naive to hope that the agency, even under new leadership, can summon the will to radically reform the system in a way that comports with the realities to today's technologically dynamic, competitive telcom marketplace. This would mean substantially reducing the current subsidies.

Rather than reforming the regime, what appears as likely, given the predilections of the current acting Chairman of the Commission and potentially of the new Chairman, is that the newly-reconstituted Commission will propose to glom a new broadband subsidy regime onto the already-broken existing USF regime. This would be a big mistake. If it happens, the current 13% phone tax might look like a bargain.

To the extent that any federal support for broadband is needed, for reasons I explained in my recent FCC comments on the national broadband plan, it should be directed to presently unserved areas. The funds should be distributed through competitive bidding mechanisms, and they should come from the general Treasury, not a tax on communications services.

Thirteen is generally considered an unlucky number. But if the new 13% tax serves as a wake-up call to our policymakers that they can no longer avoid universal service reform, then perhaps the number 13 will come to be seen -- at least among those interested in sound communications policy -- in a more favorable light.