Study: State Broadband Rate Controls Have Bad Consequences for Investment and Competition

On May 29, ACA Connects held a webinar highlighting a newly released study by Cartesian titled "State Broadband Rate Regulation: Impact on Investment and Competition." The study analyzes the negative effects of state-level price controls for fixed broadband Internet service investment and access.  

My February 2025 Perspectives from FSF Scholars, "States Should Keep Broadband Internet Services Free From Price Controls," addressed New York's requirement that fixed providers in the state offer $15 and $20 monthly price plans to qualifying consumers. In response to the state's law requiring service offerings at rates far below market, AT&T discontinued its AT&T Internet Air fixed wireless access (FWA) service. Also, Starlink petitioned for an exemption and thus apparently intends to limit its subscribership to less than 20,000 in New York. Those early responses to the implementation of New York's law are real-life examples of how imposing price controls in competitive markets creates more problems than it solves. New York's rate regulation has discouraged market entry by new providers using innovative technologies. 

 

Back to the Cartesian study. Based on its economic model, Cartesian found that price caps on fixed broadband Internet service would result in most states losing 15% to 35% of modeled capital expenditures by marketplace providers, depending on the state and based on whether it imposes a $30 monthly or $15 monthly low-income plan mandate.  

 

Cartesian similarly concluded that American consumers lose choices as a result of state-level rate regulation, as it found that most states would get 15% to 35% fewer locations served by new competitive entrants. Among its key findings: a 19% drop in investment (per $30 low-income monthly plan) would result in one less provider for 3.3 million locations, and a 41% drop in investment (per a $15 low-income monthly plan) would result in 7.5 million locations with one less additional competitor. 

 

ACA Connects and Cartesian should be commended for preparing and publishing the insightful study about the harmful downsides of state-level rate regulation of broadband services. 

 

The bottom line is that state-level rate regulation is a poor policy for promoting Internet access. Instead of imposing price controls that will inevitably reduce investment and new market competitors, state legislators who are concerned about affordability and lack of access for low-income households should consider options such as (1) promoting awareness of the federal Lifeline subsidy program, which offers $9.25 per month toward broadband service for qualifying households; (2) using state universal service fund subsidies or establish other state-level subsidy programs to supplement Lifeline support for their residents; (3) promoting awareness of private affordability programs such as Xfinity's Internet Essentials. 

TMT with Mike O'Rielly – Ep 22: Pending SCOTUS Decision on USF

Episode 22 of "TMT with Mike O'Rielly," a videocast featuring former FCC Commissioner and Adjunct Senior Fellow at the Free State Foundation Michael O'Rielly, was released on June. In this episode, titled "The Pending U.S. Supreme Court Decision on the Universal Service Fund," Mr. O'Rielly has a conversation with guest Tim Donovan, President and CEO of the Competitive Carrier Association (CCA). Their conversation addresses issues involving the much-anticipated ruling by the Supreme Court in FCC v. Consumers' Research. Streaming video of the episode is now available:

House Committee Advances Bill for Vetting Recipients of High-Cost Broadband Subsidies

On April 8, the House Commerce Committee voted 50-1 to pass the Rural Broadband Act of 2025 – HR 2399. The bill would require the FCC to establish a vetting process for future applicants for future high-cost universal service program funding for deployment and supporting broadband Internet access services. The purpose of the vetting process is to ensure that subsidies go to entities that are capable of fulfilling their universal service obligations. 

The Rural Broadband Act has been introduced in prior Congresses. My blog post from February 16, 2023, describes a bit more about the bill as it was introduced in the 118th Congress by Senators Shelley Moore Capito and Amy Klobuchar. 

 

This bi-partisan legislation appears to be a reasonable measure to help prevent money collected from U.S. consumers via surcharges – effectively, "USF Taxes" – being misspent and wasted. The House of Representatives should give HR 2399 an up-or-down vote.

 

Meanwhile, the need for an overhaul of the Universal Service Fund is still pressing. As Free State Foundation President Randolph May and I explained in our August 2023 comments to the Universal Service Reform Working Group: "Reform of the USF subsidy system is urgently needed because the system is outdated and no longer fiscally sustainable." The existing universal service regime was established in a voice-centric 1990s context, with a broader contribution base and much smaller sized fund than today with a dwindled base and a bloated annual distribution amount of $7 billion to $8 billion. As a result, the USF Tax has continued to climb, and the most recent proposed quarterly contribution factor increase will raise the USF Tax to 36.6%.

 

Notably, the constitutionality of the contribution mechanism of the USF was the subject of oral arguments before the Supreme Court on March 26 of this year. Regardless of the Court's verdict on the constitutionality of the USF's contribution system, economic realities require reforms. One possible reform is switching from the USF Tax to appropriations by Congress. Another reform option is expanding the contribution base to major Internet websites that benefit the most from universal broadband connectivity. Those ideas were among the many topics discussed at the Free State Foundation's Seventeenth Annual Policy Conference – #FSFConf17 – held on March 25, 2025, in Washington D.C. Video of the conference panels, keynote addresses, and keynote conversations are available online.

USF Tax Rises to Record High 36.6%

On March 13, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the second quarter of 2025 will be 36.6%. Absent intervention by the FCC's Commissioners, the proposed rate will soon go into effect. 

The expected rate hike to 36.6% appears to result in another new all-time high for the "USF Tax." It is far higher than the rate from a few years ago. 

 

The U.S. Court of Appeals for the Fifth Circuit rightly called USF surcharges an unconstitutional "USF Tax." They are imposed on voice consumers based on a percentage of the long-distance part of their monthly bills. The money paid by consumers is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the private corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

 

The Supreme Court granted a writ of certiorari in FCC v. Consumers' Research, a case involving the issue of whether the USF contribution mechanism is constitutional under the Article I, Section 1 Legislative Vesting Clause. The Court will hold oral arguments in the case on March 26. 

 

USF reform is one of the topics that is sure to be part of the discussion at the Free State Foundation's upcoming Seventeenth Annual Policy Conference – #FSFConf17. The conference will be held in Washington, D.C. on March 25. Conference registration and the conference agenda are available online. 

USF Tax Hike – Now Up to 36.3%

On December 12, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the first quarter of 2025 will be 36.3%. Early Happy New Year to American consumers! The rate hike to 36.3% appears to be yet another all-time high for USF surcharges – something the U.S. Court of Appeals for the 5th Circuit rightly called an unconstitutional "USF Tax." Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will go into effect. 

USF surcharges are functionally taxes paid by voice consumers on the long-distance part of their monthly bills. The money consumers pay is collected by the voice carriers and passed on to the Universal Service Administrative Company (USAC), the corporation established by the FCC to administer the USF program and dole out subsidies to program recipients. 

The upcoming 36.3% USF surcharge rate is significantly higher than just a few years ago. Free State Foundation President Randolph May wrote about the recent history of spiking USF surcharge rates and concerns about the viability of the USF contribution system in his blog post from June 14 of this year, "The Telephone Tax Rises Again – Now 34%." 

 

As observed in my November 26 blog post, the Supreme Court has granted a writ of certiorari in Consumers' Research v. FCC. The case, which will review an en banc decision by the 5th Circuit this summer, will be closely watched by many, including taxpayer advocates and opponents of the overreaching administrative state. In Consumers' Research v. FCC, the Court will decide the constitutionality of the USF contribution mechanism and the USF Tax.

TMT with Mike O'Rielly - Ep 15: Structural Problems in the ACP

Episode 15 of "TMT with Mike O'Rielly," a videocast that features former FCC Commissioner and Adjunct Senior Fellow at the Free State Foundation Michael O'Rielly, was released on December 6. This episode, titled "Structural Problems in the Affordable Connectivity Program," is a conversation between Mr. O'Rielly and guest Ryan Tracy, Co-Writer at Capital Account. Streaming video of the Episode 15 is now available: 

Supreme Court Agrees to Hear Challenge to USF's Unconstitutionality

On November 22, the Supreme Court granted a writ of certiorari in Consumers' Research v. FCC. The case involves a constitutional challenge to the Universal Service Fund's (USF) contribution mechanism – or "USF Tax." The grant of certiorari is welcome news because it means that the court will resolve a circuit split between the Fifth Circuit. It also provides occasions for the court to clarify the doctrinal status and contours of the non-delegation doctrine. 

The roughly $8 billion annual USF subsidy program is funded by USF surcharges included as line items on the long-distance portion of voice consumers' monthly bills. Due to the increasing size of subsidy distributions and the shrinking size of the contributor base, the quarterly-adjusted surcharge rate has risen to 35.8% -- a much, much higher rate than just a few years ago. 

 

The Supreme Court will be reviewing the July 24 en banc decision by the U.S. Court of Appeals for the Fifth Circuit that determined the universal service contribution mechanism violates the Legislative Vesting Clause of Article I of the U.S. Constitution. The Fifth Circuit held that Congress's broad delegation of tax authority to the FCC under Section 254 of the Communications Act, combined with the agency's delegation of tax authority to a private entity to collect surcharges from voice carriers and administer the USF, constituted a constitutional violation. Fifth Circuit's en banc decision in Consumers' Research v. FCC, as well as the concurring and dissenting opinions, are summarized in my August 5, 2024 Perspectives from FSF Scholars, "Fifth Circuit Rules USF Contribution Scheme Violates Legislative Vesting Clause." 

 

The Sixth and Eleventh Circuits previously upheld the USF's contribution mechanism from identical challenges. The Supreme Court will resolve the split between the lower courts. And the court will have occasion to revisit the non-delegation doctrine, which is implicated by the case.  

 

In 2025, expect Free State Foundations scholars to have more to say about a future Supreme Court decision in Consumers' Research v. FCC and the need for Congress to modernize the USF for the broadband era. 

USF Surcharge Rate Hike – Now Up to 35.8%

On September 11, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the fourth quarter of 2024 will be 35.8% This appears to be an all-time high and serious concern for voice consumers who bear the burden of paying for USF surcharges. Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will soon go into effect.

Functionally, USF surcharges are taxes paid by voice consumers on the long-distance portion of their monthly voice service bills. The USF tax money collected by the voice carriers goes to the Universal Service Administrative Company (USAC), a corporation established by the FCC, which is the administrator of the USF program and distributes the money to program recipients. For additional background on the recent history of persistent and worrisome increases in the USF surcharge rate, see Free State Foundation President Randolph May's June 14, 2024 blog post, "The Telephone Tax Rises Again – Now 34%." 

 

My August 9 Perspectives from FSF Scholars, "Court Ruling on USF's Unconstitutionality Should Spur Reform in Congress" explained that the Fifth Circuit’s decision holding the USF contribution scheme unconstitutional in Consumers' Research v. FCC should serve as a catalyst for Congress to promptly undertake fiscal reforms of the USF program and put it on stronger constitutional footing.  

Lawsuit Challenges FCC Order Subsidizing Wi-Fi Away from Schools and Libraries

On August 29, a petition was filed in the U.S. Court of Appeals for the Fifth Circuit that challenges the legal basis for the FCC's July 2024 Off-Premises Wi-Fi Order. The petition filed in Molak v. FCC states that the Commission's order "unlawfully expands the FCC’s E-Rate Program to subsidize Wi-Fi service and equipment anywhere students might go." E-Rate is part of the Universal Service Fund (USF), which is funded by surcharges – functional taxes – paid each month by voice consumers. The petition alleges that the order’s increase in E-Rate Program outlays will directly increase USF surcharges that the petitioners pay each month. It also alleges that subsidizing Wi-Fi use away from school premises "enabl[es] unsupervised social-media access by children and teenagers."

The unlawfulness of the Commission's Off-Premises Wi-Fi Order is the subject of my August 20 Perspectives from FSF Scholars, "FCC Can't Subsidize Wi-Fi Use Away from Schools and Libraries." As explained therein, Section 254(h) of the Communications Act, the statutory provision that provides the legal basis for the E-Rate Program and upon which the Commission relies for its order, authorizes universal service subsidies only to or for "schools," "classrooms," and "libraries." But subsidies for off-premises Wi-Fi use – potentially anywhere in the world – are not included in the statute.

 

Moreover, the legal challenge to the Off-Premises Wi-Fi Order in Molak v. FCC parallels a prior legal challenge with an identical case name that was filed in the Fifth Circuit last year against the Commission's 2023 School Bus Wi-Fi Order. The prior agency order authorized universal subsidies for Wi-Fi equipment and service on school buses. The unlawfulness of the prior order is the subject of a February 2024 Perspectives from FSF Scholars by Free State Foundation President Randolph May and I, titled "FCC's School Bus Wi-Fi Subsidy Lacks Statutory Support."

 

In both Molak v. FCC cases, the petitioners raise important issues about agency accountability to the law and to the American public. The outcome of these pending legal challenges to administrative agency overreach will have implications for responsible spending of precious dollars collected from the public and for child online safety.

After Court Ruling on USF's Unconstitutionality, Congress Should Pass Reforms

On August 26, the U.S. Court of Appeals for the Fifth Circuit issued an order staying the issue of a mandate for its July 24 decision holding that the Universal Service Fund’s (USF) contribution mechanism – or "USF tax" – violated the U.S. Constitution's Article I Legislative Vesting Clause. The stay order anticipates that the FCC will be filing a petition for certiorari with the Supreme Court and that the stay will then be extended until the court final disposition.

The lengthy Fifth Circuit en banc decision in Consumers' Research v. FCC, as well as the concurring and dissenting opinions that were issued, are summarized in my August 5, 2024 Perspectives from FSF Scholars, "Fifth Circuit Rules USF Contribution Scheme Violates Legislative Vesting Clause."

 

My August 9 Perspectives from FSF Scholars, "Court Ruling on USF's Unconstitutionality Should Spur Reform in Congress" explained that Congress should not wait for the Supreme Court to act. As I wrote: 

Congress should act promptly to make the USF program fiscally sustainable and constitutionally sound for the broadband era. It should fund the USF via direct appropriations and intelligibly define broadband as a service eligible for support. If needed, Congress should consider requiring major online companies to make USF contributions under principles that limit subsidy amounts. Along with stronger curbs on waste and abuse, such reforms would preserve universal service, eliminate or at least reduce significantly the USF tax on consumers – which now stands at 34.4% – and enable future downsizing of the USF into a primarily voucher-like program supporting low-income consumers.

The Fifth Circuit's stay order avoids any sudden disruption to the USF program. It also provides window of time for Congress to exercise its authority and finally pass reforms that will modernize the USF program. Congress should make the program more efficient in supporting broadband access for those who are most deserving of help and ensure its future financial sustainability.   

TMT with Mike O'Rielly – Ep 10: History, Present, and Future of the USF

Episode 10 of "TMT with Mike O'Rielly," a videocast featuring former FCC Commissioner and Adjunct Senior Fellow at the Free State Foundation Michael O'Rielly, was released on August 8. In this episode, titled "The History, Present, and Future of the Universal Service Fund," Mr. O'Rielly is joined by guest Dr. Harold Furchtgott-Roth, a former FCC Commissioner and currently Senior Fellow and Director for the Center for the Economics of the Internet at the Hudson Institute. 

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.   

Sen. Ted Cruz Offers Eight Principles for USF Reform

On March 6, Sen. Ted Cruz released a white paper, "Protecting Americans from Hidden FCC Tax Hikes: A Blueprint for Universal Service Fund Reform." Credit due to Sen. Cruz for addressing the need for reforming the USF Program. The white paper puts forth Sen. Cruz's priorities for overhauling and updating the USF system to work more efficiently at connecting those who need it while protecting consumers from over taxation and wasteful spending. Sen. Cruz's white paper includes a list of eight principles to guide USF reform that merit careful attention. Those principles also are provided in a press release:

1. Put Congress back in the driver’s seat;
2. Move social welfare spending on-budget;
3. Eliminate program duplication;
4. Stop subsidizing networks that face unsubsidized competition;
5. Do not subsidize Infrastructure Investment and Jobs Act-funded (IIJA) networks’ ongoing operational costs;
6. Target low-income subsidies to those who truly need them;
7. Ensure E-Rate is truly improving education and not aggravating kids’ screen addictions;
8. Establish better controls to stop waste, fraud, and abuse.

Among other things, Sen. Cruz's white paper insists that USF distribution reform should come before contribution reform, or else the program will continue to expand and further burden consumers. It also addresses the FCC's recent expansion of the Lifeline program to include subsidies for Wi-Fi equipment on public school buses. Free State Foundation President Randolph May and I address this subject in our February 2024 Perspectives from FSF Scholars, "FCC's School Bus Wi-Fi Subsidy Lacks Statutory Support."

 

USF reform will be one of the topics to be discussed at FSF's Sixteenth Annual Policy Conference – #FSFConf16 – which will take place in Washington DC on March 12. There still is time to register online. 

Senate Bill Would Require USF Contributions From Major Edge Providers and ISPs

On November 16, the Lowering Broadband Costs for Consumers Act of 2023 was introduced in the U.S. Senate. This Universal Service Fund (USF) reform bill would expand the contribution base to include mega-popular edge providers who generate substantial yearly U.S. revenues. The Act comes with bipartisan sponsorship by Senators Markwayne Mullin, Mark Kelly, and Mike Crapo. As of this blog post, the Act has yet to receive a bill number, but the text of the legislation is available on Sen. Mullin's website, along with a press release. The Senate should give this bill due consideration.

 

The Lowering Broadband Costs for Consumers Act provides that, within 18 months of the bill being passed into law by Congress, the FCC "shall complete a rulemaking to reform the Universal Service Fund by expanding the contribution base so that broadband providers and edge providers… contribute on an equitable and non-discriminatory basis" to "specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." Importantly, the Act would require contributions only from the largest broadband providers and edge providers, as the bill exempts from contribution requirements broadband providers and edge providers that either: (1) transmit less than 3% of estimated broadband data transmitted in the U.S. during the prior year (as determined by the Commission) and earn less than $5 billion dollars in U.S. revenue during the prior year; or (2) would have a "de minimis" level of contribution to universal service under the Commission's mechanisms. 

 

The Act's definition of an "edge provider" includes digital ad services, search engines, social media platforms, streaming services, app stores, cloud computing services, over-the-top or other text-messaging services, videoconferencing services, video game services, and e-commerce platforms. 

 

The sponsors of the Lowering Broadband Costs for Consumers Act should be saluted for introducing legislation that would tackle the serious problem of the USF contribution scheme's fiscal unsustainability. It makes all the sense in the world to require at least some amount of USF contributions from the service providers who are responsible for the overwhelming majority of the Internet's traffic and who financially benefit the most from internet connectivity. Free State Foundation President Randolph May described the USF system's precarious financial situation and the urgent need for contribution reform in our August 2023 public comments filed with the Universal Service Fund Working Group that is led by Sens. Ben Ray Luján and John Thune. 

For other legislation introduced in the 118th Congress that would address the USF contribution scheme, see my blog post from March of this year, titled "Senators Reintroduce Bill to Require FCC Report on USF Contribution Reforms." Therein I describe the FAIR Contributions Act, which would require the Commission to conduct a feasibility study on collecting USF contributions from Internet edge providers.  

State Court Weighing USAC on Tax Immunity for Lifeline

On October 26, the Washington Supreme Court heard oral arguments in Assurance Wireless USA v. State of Washington Department of Revenue. At issue in the case is Washington State's attempt to impose retail sales tax obligations on Assurance for providing wireless services to individual participants in the Lifeline program. The parties disagree over the Assurance's provision of wireless services to individuals is a taxable sale. The Lifeline subscribers do not pay Assurance for the service, and Assurance claims that the FCC is the buyer of Lifeline services because payment to Assurance comes from the FCC via the U.S. Treasury and that the transaction is therefore immune from state taxation. But the State argues that the Universal Service Administrative Company (USAC) is the buyer of the wireless services for Lifeline users, and thus as a private corporation – and not, it is argued, a federal instrumentality – the transactions are not immune from taxation.

Indeed, the central question to be addressed by the Washington Supreme Court in Assurance Wireless USA is whether the USAC is a federal instrumentality that is exempt from state taxation. Owing to the peculiar composition and function of the USAC in administering the Lifeline program on sub-delegated authority from the FCC, the parties' briefings offer sharply contrasting views on the matter.

According to Assurance's supplemental brief: 

Unlike a federal contractor, USAC is so interconnected with the FCC's function of universal service that the two cannot realistically be viewed as separate. USAC was created at the FCC's direction. Pet. 22. USAC has no funding apart from the USF, and the FCC approves its quarterly administrative budget. 47 C.F.R. § 54.423. The FCC prescribes each of USAC's functions and the rules under which it carries out these functions. USAC must report the amounts of money disbursed for Lifeline to the FCC on a quarterly basis. 47 C.F.R. § 54.702(h). Such reporting must comply with federal financial management statutes. 47 C.F.R. § 54.702(n). The FCC appoints and/or approves all USAC’s board members. 47 C.F.R. § 703(c)… For purposes of federal laws, courts have noted the FCC's control over USAC is so integrated that USAC should be treated as the government… If USAC does not "stand in the shoes" of the FCC when it performs mere ministerial tasks at the FCC’s behest, no private entity would ever be treated as an instrumentality. Pet. 26. No court has overruled the longstanding precedent which extends tax immunity to federal instrumentalities. See Rev. Rul. 57-128, 1957-1 C.B. 311 (listing factors that the I.R.S. uses to determine if entities are instrumentalities of states for purposes of the federal taxation).

But the Washington Department of Revenue views the USAC differently: 

[T]he U.S. Supreme Court has narrowed the concept of an "instrumentality" of the federal government. In order for the courts to confer tax immunity on a private entity, that entity must be "incorporated into the government structure." New Mexico, 455 U.S. at 737 (internal quotation marks omitted). Or, stated slightly differently, the private entity must be "'so assimilated by the Government as to become one of its constituent parts.'"… Congress has not conferred tax immunity on the USAC, and Assurance does not argue otherwise. Moreover, imposing a state retail sales tax on goods or services purchased by the USAC in no way interferes "with the functions of [the federal] government itself." New Mexico, 455 U.S. at 736… Instead, the USAC is a wholly-owned subsidiary of a trade association that has been given the responsibility to "collect, pool, and disburse the universal service support funds contributed by carriers." Incomnet, 463 F.3d at 1067. Moreover, the USAC has expressed publicly that it is not "a federal government agency or department or a government controlled corporation." CP 299. Likewise, the FCC has publicly acknowledged that the USAC "is a private corporation, not a public entity." Report on the Future of the Universal Service Fund, FCC 22-67 at *41 ¶ 117, 2022 WL 3500217 (F.C.C. 2022) (citations omitted). Because the USAC is a private corporation and not a federal entity, members of its board of directors are not required to be nominated and appointed by the President of the United States under the Appointments Clause of the federal constitution. Id.

There is no timeline on when Washington Supreme Court will make its decision. However, I favor the view that the USAC is a federal instrumentality and thus immune from taxation.

 

Free State Foundation President Randolph May and I address a broader set of structural issues regarding universal service – including programs such as Lifeline – in our April 2021 Perspectives from FSF Scholars, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." And in August of this year, FSF President May and I submitted public comments with Universal Service Fund Working Group led by Senators Ben Ray Lujan and John Thune. 

USF Surcharge Rate Spikes to 34.5%

On September 13, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the fourth quarter of 2023 will be 34.5%. This appears to be a record high and a matter of concern for voice consumer welfare and for the future financial integrity of the USF. Absent any unlikely intervention by the FCC's Commissioners, the proposed rate will soon kick in.

The 34.5% figure may not be as high as the prediction of a 36.2% rate for the quarter that was recently was made by an analyst – and discussed in Free State Foundation President Randolph May's September 6 blog post, "How Do You Spell 'Unsustainable'? U-S-F!" But 34.5% is unreasonably high and burdensome on voice consumers. The recent rate increase provides another reminder that a future financial derailment of USF remains an alarming realistic concern that Congress should address. 

 

As briefly noted in my blog post from March 15 of this year, "Consumers Still Burdened as FCC Sets USF Surcharge Rate at 29%" – the USF contribution factor is used to determine the line-item surcharge on voice consumers' monthly bills. The surcharges effectively are taxes on voice consumers to pay for USF programs. 

 

On August 25, the Free State Foundation submitted comments to the Universal Service Working Group lead by Senators Luján and Thune. In those comments, we recommended that Congress replace the current USF system with a broadband-oriented regime that is more focused on supporting low-income Americans and more politically accountable. 

How Do You Spell 'Unsustainable'? U-S-F!

According to a report in Communications Daily, the estimable analyst Billy Jack Gregg projects the "USF contribution factor" will likely increase to 36.2% during Q4 2023, making it the “highest quarterly contribution factor in the history of the USF.” Based on two decades of observation, I'd say you can take Mr. Gregg's projections to the bank. Or maybe more appropriately in this instance, prepare to make a bit larger withdrawal from your bank to pay your telephone bill. 

Mr. Gregg stated total revenue collected will also be about $362 million less than the previous quarter.

 

Let me repeat what most readers already know. Revenue collected from the "USF contribution factor" – "surcharge," or "tax" if you want to call a spade a spade – continues to decline as more and more people abandon the traditional telephone services on which the surcharges are assessed. So, the surcharge has increased from 5.6% in 2000 to 12.9% in 2010 to 27.1% in 2020 to the now projected 36.2% for the last quarter of 2023.

You get the picture.

 

The current Universal Service Fund subsidy regime is unsustainable, and it must be meaningfully reformed. This is not to say that there should not be subsidies to support universal service goals, including support for low-income persons and for high-cost areas that otherwise would not be served. It is to say the legacy universal service regime is broken – and clearly unsustainable.

 

It needs to be replaced with a broadband-centric regime that is economically efficient, effective, transparent, and politically accountable. For a roadmap regarding how to accomplish that objective, please see the Free State Foundation's extensive comments submitted on August 25 to Senators Luján and Thune and the Universal Service Working Group.

 

Sixth Circuit Denies Nondelegation Challenges to USF Regime

On May 4, the U.S. Court of Appeals for the Sixth Circuit rejected nondelegation and private nondelegation challenges to Section 254 of the Communications Act. In Consumers' Research v. FCC, a three-judge panel for the Sixth Circuit held unanimously that the statutory framework regarding universal service that Congress provided the FCC in Section 254 "contains an intelligible principle because it offers nuanced guidance and delimited discretion to the FCC." Additionally, the court held that "[b]ecause of the [Universal Service Administrative Company's] subordination to the FCC and its assistance with fact gathering and ministerial support, there is no private non-delegation doctrine violation."

A similar legal defeat regarding nondelegation challenges to the administrative mechanism for funding universal service took place in the Fifth Circuit on March 24 of this year. Apparently, the decision in the Fifth Circuit is the subject of a pending petition for en banc review by the entire Fifth Circuit. Another case raising nondelegation challenges to Section 254 is still pending in the Eleventh Circuit. 

Fifth Circuit Denies Nondelegation Challenges to USF Regime

Today, March 24, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit denied constitutional challenges to the administrative regime for the Universal Service Fund. In Consumers' Research v. FCC, the Fifth Circuit rejected the claim that Congress improperly delegated authority to the Commission to administer the USF under Section 254 of the Communications Act. According to the court, Section 254 supplied the Commission with intelligible principles when it tasked the agency with overseeing the USF, and that the statute sufficiently limited the agency's power to raise revenues. Additionally, the Fifth Circuit ruled that the FCC's redelegation of authority to the USAC to administer the USF does not run afoul of the private nondelegation doctrine. According to the court, the USAC is subordinate to the Commission and the agency is not bound by USAC decisions. Instead, the Commission but can review the USAC's decisions and grant relief from them as well as determine how USF contributions are calculated and review the calculations made by the USAC.

As noted in an April 2022 blog post, President Randolph May and the Free State Foundation joined an amicus brief that was filed with the Fifth Circuit in this case. 

 

Although in Fifth Circuit appears to have made short work of nondelegation challenges to the USF in Consumers' Research v. FCC, there are nondelegation-related challenges to the scheme for administering the USF still pending in the Sixth and Eleventh Circuit Courts of Appeal.