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 The tax funding mechanism is backwards and outdated.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.
Posts
