The Telephone Tax Rises Again - Now 34%

On June 12, the FCC announced that the tax paid by consumers on all interstate and international traditional voice telephone calls to support the Commission’s Universal Service Fund (USF) will increase to 34.4% from 32.8%.

 

I understand that the FCC insists on calling this tax a “contribution factor.” That’s fine if you prefer euphemisms to more precise usage of the English language. It’s like saying that compelling Internet service providers to adopt, within certain tightly prescribed limits, an “affordable low cost” service option is not “rate regulation.”

 

Call it what you will – tax or contribution factor – it’s going up again. At 34.4%, it’s now a third of the price of the telephone call itself. To put this figure in perspective, in 2000 the tax was 5.6%; in 2005, 10.2%; in 2010, 12.9%; in 2015, 16.7%; and in 2020, 27.1%.

 

You can detect a troubling pattern here, right?

 

As the number of contributors who make traditional voice telephone calls shrinks and the size of the subsidies which comprise the USF increase, or even remains stable, the tax necessary to support the subsidies continues its inexorable rise. This is not a sustainable paradigm.

 

I’ve been arguing for reform of the universal service system put in place by the FCC after the Telecommunications Act of 1996 for two decades. At least now, even if belatedly, there is more widespread agreement that the current regime is broken and needs to be meaningfully reformed to reflect the realities of today’s digital communications marketplace.

 

A bipartisan group of Senate and House lawmakers has been working for many months now to come up with a proposal to replace the current regime with a new one. They need to think boldly.

 

Along with Seth Cooper, I submitted extensive comments on August 25, 2023, to the bipartisan congressional Universal Service Fund Working Group explaining the need for fundamental reform and detailing what those reforms should be. Likewise, we’ve submitted extensive comments and reply comments in connection with the FCC’s own latest proceeding to examine the future of universal service.

 

While those extensive comments should be consulted for complete recommendations, here I will just highlight a few key points:

 

·      A reformed universal service system must be based upon principles of transparency, fiscal discipline, and political accountability.

 

·      Ideally, universal service requirements, when properly sized to reflect needed fiscal discipline, should be funded through periodic multi-year direct congressional appropriations.

 

·      If not funded through multi-year congressional appropriations, Congress should consider the feasibility of imposing some form of contribution requirement from major Internet platform providers that benefit so greatly from the advanced broadband networks to which they presently are not required to support.

 

·      Subsidies to support access for low-income persons should be continued through a voucher system akin to the Affordable Connectivity Program but with considerably stricter eligibility criteria and heightened safeguards to prevent waste, fraud, and abuse.

 

This latest increase in the tax imposed on traditional voice telephone calls should be a further impetus – as if a further impetus should be needed! – to get on with the important task of meaningfully reforming the existing universal service regime.   

Affordable Connectivity Program Ends, ISPs Voluntarily Fill the Void

On June 1, the Affordable Connectivity Program (ACP) officially came to an end, at least for now. Some hold out hope that Congress still might appropriate additional funding. In the meantime, Internet service providers (ISPs) have stepped in to make available to low-income households broadband service plans priced at or below $30 per month until at least the end of 2024.

Through April, the ACP provided to eligible households a $30 monthly subsidy ($75 on Tribal lands and, as I described in an August 2023 post to the FSF Blog, up to $75 in certain high-cost areas) that they could apply to their choice of broadband service plan offered by a participating provider. In May, the $14.2 billion appropriated by Congress in 2021's Infrastructure Investment and Jobs Act was close to running out, so participating households received only a partial benefit.

In a press release marking the program's final day, FCC Chairwoman Jessica Rosenworcel noted that over 23 million households participated in the ACP; urged Congress to provide additional funding; and highlighted the Lifeline program, which offers a $9.25 monthly benefit to a smaller set of eligible households. For one, Lifeline limits eligibility to those households whose income is less than 135 percent of the Federal Poverty Guidelines, a threshold that Free State Foundation President Randolph J. May urged Congress to adopt on numerous occasions, must recently in "The Conservative Case for Saving the Affordable Connectivity Program by Reforming It."

As the White House highlighted in its own press release, however, in the wake of the ACP's demise, fourteen ISPs have made voluntary commitments "to offer plans at $30 or less to low-income households through 2024, so that families across America can continue accessing low-cost Internet." That list includes AT&T, Comcast, Cox, Charter Communications, and Verizon, as well as a number of smaller ISPs that serve rural areas.

The Conservative Case for Saving the Affordable Connectivity Program by Reforming It

 

The Affordable Connectivity Program, a $14.2 billion subsidy program established by Congress in 2021 to support broadband access for lower-income American households, may soon be ending. April was the last month during which the over 23 million participants received the full $30 ($75 on tribal lands) monthly subsidy. In May, customers will receive a partial ($14) benefit if their Internet service providers (ISPs) agree to provide one.

After that, the appropriated funds will be gone. For over a year, I’ve advocated extension of the ACP program. But as I wrote in a recent piece in the Washington Examiner, “only if it is meaningfully reformed to render it more fiscally responsible.” I said there, and previously, that “[t]his can be accomplished by adopting a considerably more restrictive eligibility requirement and further measures to reduce waste and fraud in the program."

There’s little doubt that, for most of us, access to a high-speed broadband connection enhances the quality of our lives. Adequate broadband access is usually required to take advantage of various educational opportunities, apply for jobs, interact with government websites, participate in community activities, or use social media. So, like government benefit programs that provide subsidies to low-income persons for securing food, housing, or energy assistance, a properly conceived and efficiently operated Affordable Connectivity Program can be an important “safety net” worthy of support from conservatives.

 

Moreover, by providing qualifying low-income households with a voucher to choose their broadband provider, the ACP program empowers them. Unlike the current legacy Lifeline model that provides support for telecom services indirectly to low-income persons by subsidizing the service providers, under ACP the consumer participates directly in the competitive broadband marketplace. This is a more market-oriented pro-consumer-choice approach.

 

So, there is a conservative case for saving the ACP program on the condition it is reformed.

 

Specifically, I have argued that "there is no reason why the ACP eligibility criterion should exceed 135% of the federal poverty level," the benchmark used for the FCC's Lifeline program. In any event, Lifeline should be folded into a reformed ACP program.

 

I made similar arguments in two earlier Perspectives from FSF Scholars, "The Affordable Connectivity Program: Time Is of the Essence for Congress to Act" in March 2023 and "Congress Should Extend and Revise the Affordable Connectivity Program" in October 2022. And others have expressed related concerns. As I noted in the Washington Examiner piece, Senator Shelley Moore Capito asserted that "we need to have accountability to make sure that the people who are receiving this benefit are the ones that actually cannot pay, and would not pay otherwise had they not had the extra money to be able to afford this."

More recently, Senator Ted Cruz leveled a more forceful critique:

[T]he [ACP] is not working as Congress intended: to assist those for whom cost was the barrier to gaining internet access…. [I]t turns out the vast majority of [participants] already had high-speed internet. Here's an FCC survey showing just 22 percent of the households receiving the taxpayer subsidy were previously unsubscribed to broadband. This means that for every household that didn't subscribe to premium internet, the federal government is subsidizing four households that did. Beyond this inefficiently, reports have also found – unsurprisingly – that ACP has had inflationary effects on the price of internet."

As the end date approaches, proponents have floated various legislative solutions, some with their own flaws. On April 26, Senate Commerce Committee Chair Maria Cantwell released an amended version of her Spectrum and National Security Act discussion draft that would reinstate the FCC's long-lapsed spectrum auction authority and lend the FCC $7 billion (up from $5 billion in the original) to replenish the ACP with the promise of future auction revenues as collateral.

As Harold Furchtgott-Roth, an economist and former FCC Commissioner, and Kirk Arner wrote in RealClear Markets:

This is a bad idea that would set a dangerous precedent. Federal agencies do not ordinarily borrow large sums from Treasury. If this were allowed to occur, other agencies would quickly seek similar 'borrowing authority' to pay for projects that are unaffordable today, hoping that requisite funds might be scrounged up somewhere else tomorrow.

They also agreed that "[i]f Congress decides to extend ACP, it should narrow the program to only cover households that but for the program's subsidy would not already be subscribed to Internet service."

Senator John Fetterman, meanwhile, has introduced a bill that would replace the current source of ACP dollars – that is, direct congressional appropriations accompanied by the oversight inherent to the legislative process – with yet another drain on the Universal Service Fund, a regressive "tax" on the dwindling user base of Title II "telecommunications services" whose contribution factor already has reached unsustainable levels. The Promoting Affordable Connectivity Act would require broadband and edge service providers to contribute to the USF in order to fund the ACP, purportedly, and magically, without further raising costs to consumers.

Direct congressional appropriations provide our elected leaders an opportunity periodically to reexamine the operation of federal programs, including ones like the ACP, to assess their efficiency and effectiveness in meeting their programmatic goals in a fiscally responsible manner. This includes, with respect to ACP, the eligibility requirements, the size of the benefit, and the controls to prevent waste, fraud, and abuse.

Eligibility for a household to participate in the program should be reduced from 200% of the federal poverty guideline (currently $62,400 in income for a household with four persons) to 135% (currently $42,120 for a four-person household). In line with the widely reported agreement of the bipartisan congressional Universal Service Working Group, the current $100 device subsidy should be eliminated as unnecessary. And effective controls to prevent fraud and abuse should be implemented.

And considering overall fiscal constraints, the size of the current monthly benefit should be subject to reevaluation too. As Senator Cruz said at a May 2 Senate Commerce Committee hearing, “History has shown that when the federal government starts subsidizing demand ­- in higher education, in agriculture ­- the subsidy gets capitalized and prices go up.”

In my view, if reformed to ensure it is operated on a fiscally responsible basis, including restricting the eligibility requirement to no more than 135% of the federal poverty guideline, the Affordable Connectivity Program is a worthwhile “safety net” program that should be extended.

 

Moreover, as I said in my earlier Washington Examiner op-ed, “if Congress does meaningfully reform the ACP program, it will constitute an important precedent demonstrating that ‘safety net’ programs can indeed be reformed.” In the “tax and spend” environment that prevails in Washington, this would be no small achievement in and of itself.