USF Surcharges: How High Will They Climb?

On March 13 the FCC issued a public notice announcing another Universal Service Fund (USF) rate hike for voice telephone service consumers. For the second quarter of 2015, voice consumers will be stuck with what is effectively a 17.4% tax on the interstate long distance portion of their phone bills. Federal USF surcharges typically appear as a separate line-item on consumers' monthly telephone bills.

USF is a multi-billion dollar subsidy system. The surcharges imposed on voice consumers are given to telephone companies in rural or high-cost areas, as well as schools, libraries, and some health care facilities. And, in some instances, the surcharge subsidizes providers serving qualified low-income consumers. The USF subsidy system has also grown exponentially over the last dozen years. Program subsidy disbursements for telecommunications service in high-cost areas grew from $2.6 billion in 2001 to $4.17 billion in 2013. According to the FCC's 2014 USF Monitoring Report, in 2013 additional USF subsidy disbursements for low-income voice consumers totaled $1.8 billion. Health care facilities received $159 million. Also, $2.2 billion in school-related subsidies were disbursed. 

Corresponding to the steady ballooning of USF subsidy spending are USF surcharges on consumers. The charts below show the spike in the effective tax rate on consumers over the last several years.

As I described in a prior blog post, "USF Surcharge Hikes Hit Over-Taxed Wireless Consumers Hardest," the FCC treats 37.1% of a wireless consumer's calling plan as interstate long distance, and hence subject to the USF surcharge. The FCC does permit 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. Nonetheless, the hit to wireless consumers from federal USF surcharges is especially hard. Wireless consumers are subject to multiple state and local wireless taxes, fees, and surcharges, piled one on top of the other. And wireless is often taxed at a higher rate than other services subject to general sales taxes.

The FCC has begun implementing comprehensive USF reforms. We have supported those reforms and also urged the FCC to go further. But questions remain as to the FCC's follow-through.

What's more, the FCC's December E-Rate Modernization Order (2014) authorized an increase in school-related subsidies to the tune of $1.5 billion annually. Given a subsidy spending jump of that magnitude, it's hard to expect voice consumers will avoid even heavier USF surcharge burdens in the future.   

Protecting consumers should be an FCC imperative as USF reforms and modernization continues. But rising USF surcharge rates are a sign that the FCC is failing to protect consumers. Reducing USF surcharges should go hand-in-hand with comprehensive reforms that reduce the overall size of the USF subsidy system and improve its efficiency. Reforms should be implemented – and the overall size of the USF program should be capped – before any additional subsidies are extended to broadband services.