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.

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. 

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. 

Constitutional Challenge to USF's System for Subsidy Fees Filed in the 11th Circuit

On October 3, a constitutional challenge to the Universal Service system of surcharge fees – which are effectively taxes on voice consumers – was filed in the U.S. Court of Appeals in the Eleventh Circuit. The plaintiffs in Consumers' Research v. FCC raise several non-delegation claims in their petition based on Article I, Section 1 of the U.S. Constitution. Additionally, the plaintiffs challenge the statutory authority of the Universal Service Administrative Authority (USAC) to administer the subsidy fee system, and they also raise an alternative claim against the USAC's authority pursuant to the Appointments Clause in Article II, Section 2 of the Constitution. Plaintiffs also challenge the USF Tax Factor for failure to comply with the Administrative Procedures Act regarding rulemakings and for failure to be published in the Federal Register.

The claims raised in the plaintiffs' petition to the Eleventh Circuit in Consumers' Research v. FCC are similar to claims raised in pending cases in the Fifth and Sixth Circuits. The Free State Foundation and FSF President Randolph May have joined amicus curiae briefs filed by the Competitive Enterprise Institute (CEI) in both the Fifth and Sixth Circuit cases. The amicus brief joined by FSF and FSF President May was the subject of a blog post from April 19 of this year. And the other amicus brief was filed in the Sixth Circuit on September 29. Many thanks go to CEI. According to court docket records, the Fifth Circuit has tentatively scheduled oral arguments for December 5, 2022.

The constitutional and statutory challenges raised by Consumers' Research and others to the Universal Service Fund's system for imposing and administering surcharge fees are principled, thoughtful, and deserving of careful consideration by the judiciary. 

 

P.S. For recent takes on the need for Congress to modernize the Universal Service system, be sure to check out FSF President Randolph May's August 2022 Perspectives from FSF Scholars, "The FCC's USF Report: Unprecedented Broadband Funding Requires Fundamental Universal Service Reforms" as well as FSF Senior Fellow Andrew Long's August 30 blog post, "A True Assessment of the USF's Future Relevance Demands a Full Accounting of Broadband Subsidies."

Debating the Constitutionality of the Universal Service System

For thoughtful discussion and debate about the constitutionality of the universal service's contribution system as currently operated by the FCC, consider checking out the July 19 webinar hosted by the Federalist Society, titled "Consumers' Research v. FCC and the Legality of the Universal Service Fund Contribution Regime." Video and audio of the event are both available online. The event features a very knowledgeable and experienced panel that ably present their cases. Although the webinar is focused on constitutional arguments about USF raised by the Consumers Research v. FCC case, including the non-delegation issue raised by Section 254 of the Communications Act, the panel discussion also touches on USF contribution policy reform.

As noted in an April 19 blog post, the Free State Foundation and FSF President Randolph May joined an amicus brief that was filed by Competitive Enterprise institute in the Consumers' Research case.  

FSF President Randy May also addressed constitutional issues regarding USF in his November 2021 Perspectives from FSF Scholars, "A Nondelegation Doctrine Challenge to the FCC's Universal Service Regime." Also check out our April 2021 Perspectives, "Congress Should Put Universal Service on a Firmer Constitutional Foundation." Also, I addressed USF contribution reform in my June 2022 Perspectives, "Congress Should Require Major Web Platforms to Support Universal Service."

Federalist Society Podcast Panelists Tackles NFIB v. OSHA and Non-Delegation

The Federalist Society-hosted "Regulatory Transparency Project's Fourth Branch Podcast" features an episode from January 20 on "The Vaccine Mandate Cases and the Future of Administrative Law." The podcast episode featured a panel discussion about the U.S. Supreme Court's decisions released January 13 in NFIB v. OSHA and Biden v. Missouri. The panelists addressed the Court's reasoning in those cases regarding statutory authority and legal doctrines such as non-delegation, major questions, and constitutional avoidance.

One of the panelists for the podcast episode was Law Professor Ilan Wurman, a member of the Free State Foundation's Board of Academic Advisors. Prof. Wurman's 2021 article in the Yale Law Journal on "Non-Delegation at the Founding" was cited by Justice Neil Gorsuch's concurring opinion in NFIB v. OSHA. During the panel discussion, Prof. Wurman offered sharp insights into the differences between non-delegation, major questions, and constitutional avoidance. Listeners will benefit from the contributions of all of the episode's participants regarding the import of NFIB v. OSHA for the future of the administrative state. 

For additional insights on these topics, check out Free State Foundation President Randolph May's Perspectives from FSF Scholars titled "NFIB v. OSHA: Nondelegation, Major Questions, and Chevron's No Show."