USF Surcharge Hikes Hit Over-Taxed Wireless Consumers Hardest

On December 12 the FCC announced that the universal service contribution factor will be 16.1% for the first quarter of 2013. The contribution factor translates into the line-item surcharge added to the interstate long-distance portion of consumers' monthly phone bills. For wireless consumers, already hit with multiple state and local taxes far exceeding general sales tax rates, the USF surcharge is just like another tax. For the first quarter of 2013, wireless customers will saddled with an extra 16.1% surcharge (or tax, in effect) on the long-distance part of their bills.

USF surcharges are the now main source of the growing and disproportionate tax burden placed on wireless consumers. Heavy taxation of wireless services hits consumers and hampers investment in wireless infrastructure. This slows deployment of next-generation wireless networks that have a force-multiplier effect on business activity and job creation. Given the USF system's counterproductive burdening of wireless consumers and economic growth, the FCC should take concerted action in 2013 to reduce surcharge rates.

USF surcharges subsidize telephone companies in rural or high-cost areas, as well as schools, libraries, and some health care facilities. In some instances, the USF system subsidizes providers serving qualified low-income consumers. As the FCC has itself acknowledged, the system is outdated, lacking accountability, and increasingly costly. Over the last decade, program subsidies for telecommunications service in high-cost areas surged from $2.6 billion in 2001 and to $4.5 billion in 2011.

The chart below show the steady climb of USF contribution rates over the past decade. This upward trend has translated into ever-higher USF surcharge rates.

After kicking the can down the road for several years, the FCC finally adopted a framework for modernizing and disciplining the system in its 2011 USF Reform Order. Reforms include a first-time budget to govern USF's "high-cost" fund and keep costs under control. These reforms are commendable and should be carried out. But the FCC has only reached the early stages of implementation. And the agency has yet to adopt reforms to the contribution side of USF. The growing burden of rising USF surcharges (or taxes) on wireless consumers highlights the urgency for fully implementing and extending the scope of its comprehensive USF reforms.

In my November blog post, "Growing Tax Bills Burdening Wireless Subscribers," I called attention to a timely analysis of wireless taxes by Scott Mackey titled "Wireless Taxes and Fees Continue Growth Trend." According to Mackey, "[t]he average burden on consumers increased from 16.26 percent in July 2010 to 17.18 percent in July 2012, a 5.5 percent increase in just two years." Moreover, "Wireless customers now pay taxes, fees, and surcharges nearly two and a half times higher than the average 7.33 percent general sales tax rate imposed on other taxable goods and services."

My prior blog post focused on state and local taxation of wireless services. Yet Mackey's article also called attention to federal taxation of wireless:

[T]he primary source of the growing wireless consumer burden during the last two years is the continued increase in the federal Universal Service Fund (USF) contribution rate and the corresponding surcharge imposed on consumers to cover that obligation. The federal USF surcharge has nearly tripled over the last decade, from 2.07 percent in 2003 to 5.82 percent in 2012. In fact, the 5.82 percent federal USF rate in 2012 almost exceeds the combined federal rate imposed in 2005, when the 3 percent federal excise tax still applied to wireless service.

The FCC treats 37.1% of a wireless consumer's calling plan as interstate long distance, and hence subject to the USF surcharge. That is, 37.1% of a wireless consumer's bill is subject to the 16.1% surcharge (or tax) for the first quarter of 2013. However, the FCC permits wireless providers to classify a lower percentage of consumers' calling plans as interstate long distance if providers supply the FCC with supporting network-wide traffic studies. The FCC's 2012 USF Contribution Reform FNPRM indicates that most wireless providers submit studies rather than rely on the safe harbor. Interstate long-distance averaged 23% of network traffic in submitted studies. So, for the first quarter of 2013 the average wireless consumer will see a 16.1% USF surcharge assessed on some 23% of their calling plans.

USF surcharge mechanics aside, the current tax treatment of wireless and overall trend is unmistakable: wireless is taxed at a higher rate than other services, and the tax burden on wireless consumers is growing. Multiple state and local wireless taxes, fees, and surcharges – piled one on top of the other – subject wireless services to tax rates far above services subject to standard state and local sales taxes. And federal USF surcharges surge higher, increasing the effective tax burden on wireless consumers.

This heavy and disproportionate tax burden on wireless consumers has negative consequences for wireless infrastructure investment. Mackey cited a study indicating that wireless consumers are price-sensitive, the takeaway being that high taxes negatively impact consumer adoption of wireless services. Onerous taxes therefore impact revenues for wireless service providers. Mackey estimated that "[i]f wireless services were subject to the same tax treatment as other taxable goods and services, increased carrier revenue could make as much as $3 billion more per year available to invest in network expansion and improvements."

Reductions in wireless investment on account of over-taxation result in lost economic opportunities and job creation. Next-generation wireless networks offer increased speeds, reliability, and capacity that allow business enterprises to operate more effectively and efficiently. Taxes that discourage investment, however, potentially slow deployment of expensive infrastructure that is necessary to support next-generation wireless networks. And according to published research by economists Robert Shapiro and Kevin Hassett, "every 10 percent increase in the adoption of 3G and 4G wireless technologies could add more than 231,000 new jobs to the U.S. economy in less than a year." Heavy and disproportionate taxation of wireless that depresses investment therefore serves as a barrier to job creation.

The FCC's USF system bears special responsibility for the growing tax burden on wireless. So the FCC has an obligation to reduce the USF system's share of that burden. In order to bring about much-needed tax reform and relief for heavily and disproportionately taxed wireless services, "Universal Service Reforms Must Continue To Be Implemented." As the FCC addresses contribution reform and modernizes the system in 2013, it should take action to reduce USF surcharges on over-taxed wireless consumers.