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:

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. 

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.   

Tax Foundation Reports on Overtaxed Wireless Consumers, Including in Maryland

On November 13, the Tax Foundation released a report titled "Excise Taxes and Fees on Wireless Services Drop Slightly in 2023." It is the 14th edition of the Tax Foundation’s report on taxes, fees, and surcharges imposed by federal, state, and local governments on wireless services. According to the report, "Nationally, taxes, fees, and government surcharges make up a record-high 24.5 percent tax on taxable voice services.” Also, the report found that since 2012, the average charge from wireless providers decreased 26%, from $47.00 per line per month to $34.56 per line, yet wireless taxes, fees, and surcharges increased from 17.2% to 24.5% of the average bill.

The Tax Foundation's report helpfully describes the multiple types of taxes, fees, and surcharges that different governments impose on wireless services, and offers breakdowns and rankings for different states. Among the states, the report found that the state of Maryland had the 11th highest wireless tax rate at 15.91%. And presuming an effective federal USF tax rate of 10.83%, the result is that Maryland residents are hit with a combined federal/state/local tax rate of 26.74% on their wireless service bills. As the report observes, tax rates for wireless services in many states are significantly higher than general sales tax rates.  Maryland had the 7th highest disparity between wireless taxes and general sales tax, as Maryland's 15.91% tax rate for wireless services is much higher than the state's general sales tax rate. 

 

Rightly, the Tax Foundation's report identified serious policy problems that arise from state and local governments singling out wireless services for higher tax, fee, and surcharge burdens. The financial burdens fall the hardest on low-income consumers, many of whom live in wireless-only households for Internet access. And high taxes can harm private sector investment in wireless network infrastructure. Also, the goal of tax policy ought to be collection of revenues. To that end, tax laws should ideally be neutral toward consumer activity. It is a misuse of tax laws to target or try to change specific behaviors.

 

By shedding light on the problem of wireless over-taxation and ranking the states with the biggest wireless tax addictions, the Tax Foundation has provided an important public service. Maryland and other states should reform their tax policies and cut their taxpayers a break. 

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.  

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. 

Senators Reintroduce Bill to Require FCC Report on USF Contribution Reforms

On March 16, U.S. Senators Ben Ray Lujan, Roger Wicker, Todd Young, and Mark Kelly announced the reintroduction of the Funding Affordable Internet and Reliable (FAIR) Contributions Act. The bill, if passed by Congress, would require the FCC to conduct a feasibility study on collecting Universal Service Fund (USF) contributions from Internet edge providers. 

In a July 22, 2021 blog post, "Bill Would Require FCC to Consider Big Tech Contributions to Universal Service Fund," Free State Foundation Senior Fellow Andrew Long wrote about the FAIR Contributions Act upon its introduction in the 117th Congress. As Mr. Long explained, the FAIR Contributions Act would require the FCC to study and report to Congress on the classes of services that potentially could be assessed, along with the relative merits for different proposals for selecting those services and ways of calculating the required USF contributions. The study and report also would address what sort of statutory authority the Commission would need in order to adopt such contribution reforms as well as the impact of such reforms on universal service programs. Additionally, the report would address the continued necessity of USF once broadband service capability has been deployed to all Americans. 

USF contribution reform is sorely needed, as I reiterated in my March 15 blog post, "Consumers Still Burdened as FCC Sets USF Surcharge Rate at 29%." Indeed, as Free State Foundation President Randolph May, Mr. Long, and I wrote in public comments filed in the FCC's Report on the Future of the Universal Service Fund proceeding in February 2022: 

As it now stands, the existing universal service system is fiscally unsustainable, and it most likely will collapse unless it is fixed. The USF contribution base is shrinking while program expenditures exceed $8 billion per year. Voice consumers are subject to a 25%-to-30% surcharge rate that has climbed exponentially over the last two decades. When Congress enacted Section 254 in 1996, it primarily had in mind voice services, not broadband services. Going forward, the universal service system needs a substantial make-over to comport with today's broadband- centric Internet ecosystem. 

The FAIR Contributions Act is a step is step in the right direction. There is plenty of upside in authorizing a careful study of the issue and no downside in doing so. The Senate should timely advance the bill and the 118th Congress should pass it. 

Consumers Still Burdened as FCC Sets USF Surcharge Rate at 29%

On March 14, the FCC's Office of Managing Director announced that the Universal Service Fund (USF) contribution factor for the second quarter of 2023 will be 29%. Barring any unlikely by the FCC's Commissioners, the proposed rate will soon kick in. Although that amounts to a slight decrease compared to the first quarter contribution factor of 32.6%, the figure is still unreasonably high and burdensome on voice consumers.  

The USF contribution factor is used to determine the line-item surcharge that is added to the monthly bills of voice consumers. The surcharges are functionally taxes imposed on voice consumers to pay for USF programs. As explained in my August 23, 2022 Perspectives from FSF Scholars, "Congress Should Consider Expanding Universal Service Contributions: FCC Poses a Potential Answer to USF's Financial Problems." In addition to pursuing contribution reforms, Free State Foundation President Randolph May recommended in his August 26, 2022 Perspectives from FSF Scholars,"The FCC's USF Report: Unprecedented Broadband Funding Requires Fundamental Universal Service Reforms," that Congress should re-evaluate the size of USF programs in light of the several billions that has recently been allocated to support broadband deployment and service on top of existing outlays for USF. Those additional subsidies include the $42.45 billion Broadband Equity, Access, and Deployment (BEAD) Program. And as FSF Senior Fellow Andrew Long explained in his August 30, 2022 blog post, "A True Assessment of the USF's Future Relevance Demands a Full Accounting of Broadband Subsidies."

Importantly, there also are serious questions regarding the constitutionality of how the USF quarterly contribution factor is determined. As explained in blog posts from April 2022 and October 2022, FSF President Randolph May and the Free State Foundation have joined amicus briefs in ongoing cases before federal circuit courts of appeal that raise challenges to the FCC's USF contribution regime based on the non-delegation doctrine and the major questions doctrine. 

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."

District Court Rules That Rights-of-Way Fees on Broadband Networks Are Preempted

On June 29, a U.S. District Court determined that a 2016 city ordinance that imposed a fee for all utility services provided over the city's rights-of-way (ROW) is preempted by Section 522(7)(C) of the Communications Act, as interpreted by FCC orders. At issue in Comcast of Oregon II v. City of Beaverton, was the preemptive effect of the FCC's 2019 order that interprets the Cable Act provisions that place limits on the ability of local franchising authorities (LFAs) to impose fees on broadband services. 

The Commission's 2019 order was upheld, for the most part, by the Sixth Circuit Court of Appeals in City of Eugene v. FCC (2021). The order contains several provisions that prohibit LFAs from collecting fees from a cable operator's provision of non-cable services such as broadband Internet access services. One such provision states: "LFAs may not lawfully impose fees for the provision of information services (such as broadband Internet access) via a franchised cable system." The prohibition on LFAs regulating non-cable services provided via cable networks is known as the "mixed-use" rule. The rule is based on Section 544(b)(1) of the Cable Act, which states that an LFA "in its request for proposals for a franchise… may establish requirements for facilities and equipment, but may not… establish requirements for video programming or other information services[.]"

The District Court determined that the City of Beaverton's 2016 ordinance "imposes a fee on Comcast's provision of broadband service, which the [2019 order] as upheld by the Sixth Circuit directly prohibits. The City's fee, therefore, is preempted under 47 U.S.C. § 556(c)." Also, the District Court rejected the City of Beaverton's argument the 2016 ordinance does not constitute a preempted fee on broadband services because the fee applies generally to all utilities using public rights of way. As the District Court recognized, the Sixth Circuit foreclosed LFA's from avoiding the Cable Act restrictions by using police powers or other sources of governmental authority to indirectly impose fees on non-cable services like broadband. The District Court wrote: "The City may not 'end-run' § 544(b)(1) by also applying the fee to other utilities that also use public rights-of-way."

 

The opinion in Comcast of Oregon II v. City of Beaverton addresses other issues, with a lengthy analysis accompanying the court's retroactive application of the 2019 order. In any event, what is most important is that the decision provides practical enforcement of the Commission's policy of prohibiting cost and other regulatory barriers to broadband Internet access services. The Commission's 2019 order rightly disallows the imposition of fees that would divert cable operator resources from next-generation broadband network upgrades and would put cable operators at a competitive disadvantage in the broadband services market. 

 

In December 2018, Free State Foundation President Randolph May and I filed reply comments with the FCC in the proceeding for its 2019 order. 

Wireless Tax Hikes Mute Price Cuts - Tax Foundation Report

This week the Tax Foundation released its annual report for 2021 regarding the imposition of various taxes, fees, and surcharges on top of the charges for basic wireless services. The report highlights how regressive, record-high rates prevent low-income Americans from fully benefitting from price cuts by mobile carriers. These regressive fees almost certainly widen the digital divide, despite the consensus from policymakers that closing it is a top priority.

The overall tax rate customers paid on wireless in 2021 increased to a record high 24.96%, another year-over-year hike. Higher Universal Service Fund (USF) rates fueled the spike, though some states and localities hiked various sales taxes, 911 fees, or wireless surcharges. In total, governments collected $11.3 billion, about half for USF and half for state/local consumption taxes. Thanks to record high fees, a family of four paying $100 per month for four wireless voice lines paid $300 in fees this year. The same family paid $270 in 2020, amounting to an 11% year-over-year increase.

Taxes are increasing despite cuts in wireless service prices absent the added taxes, fees, and surcharges. The average line price dropped to $35.31 in 2021, a 15% decline from $41.50 in 2017. But consumers aren’t fully benefitting from the price cuts because the hikes in the various taxes, fees, and surcharges partly offset them.

And the burden of fee hikes falls heaviest on low-income Americans. Wireless taxes are regressive, since they are almost all flat rates or per-line fees. Plus, 74% of low-income adults subscribe to wireless voice only, compared to 65% of all adults. So every hike in wireless fees shifts more burden to low-income Americans.

Offsetting price cuts for wireless services with hikes in taxes, fees, and surcharges is no way to close the digital divide. Instead, governments should look to broader revenue sources that let consumers benefit from lower-prices. Lower prices would encourage more wireless adoption for Americans most in need. Then, closing the digital divide would be closer to a priority than lip service.

MEDIA ADVISORY: USF Contribution Factor Tops 31% and May Be Nearing a Tipping Point

The following statement may be attributed to Free State Foundation President Randolph May:

On December 14, the FCC’s Office of Managing Director announced that the Universal Service contribution factor for Q1 2021 will be a record 31.8%. This record amount is a result of a continuing drop in interstate and international revenue, The steady increase over time in the amount of the USF "tax," which is the surcharge added to every consumer’s telecom bill for interstate and international calls, is shocking and ought to receive far more widespread attention that it has. This consumer tax — because that is exactly the economic effect of USF surcharge — is regressive because, perversely, it negatively impacts low income subscribers who can least afford to pay it more than higher income subscribers who can.

 

It ought to be clear that USF surcharge increases can't go on too much longer without reaching a tipping point — that is, the point at which many more current subscribers will rapidly abandon services subject to the tax. When that happens, the current USF regime, like the proverbial house of cards, may come tumbling down. What this means is that it is time for Congress to tackle comprehensive USF reform, including especially consideration of replacing the contribution surcharge mechanism with direct congressional appropriation to fund USF programs. This would be a more sustainable, transparent, and efficient way to support the USF programs, such as Lifeline, that are deemed necessary in the public interest.  

FCC Report Spotlight State's Noncompliance with NET 911 Act

On December 8, the FCC released its 12th Annual Report on State 911 Fees and Charges. In the report, the Commission found that a handful of states diverted nearly $200 million in 911 taxes and fees to non-911 purposes in 2019 as defined by the NET 911 Act. Once again, New Jersey, New York, and Rhode Island were among the worst offenders. 

The Commission found that New Jersey spent nearly $93.6 million in 911 taxes and fees – or over 75% of the 911 taxes and fees it collected – on non-911 public safety and unrelated matters. West Virginia also made the list of states that diverted funds to non-911 purposes. And state law in Nevada apparently permitted two or more local jurisdictions to divert funds to non-911 purposes. 

The report did observe that Rhode Island and West Virginia have more recently amended their laws regarding the handling of 911/E911 taxes and fees. So there is reason to anticipate 2020 results that are more consistent with the NET 911 Act.

 

The FCC's State 911 Fees and Charges Report has again provided a useful public service that hopefully will encourage greater accountability for proper use of 911 taxes and fees in the future. 

FCC to Consider Actions Against 911 Fee Diversion

In anticipation of its September 30 public meeting, the FCC has released a draft Notice of Inquiry on ways to combat states' diversion of 911 fees to things that are unrelated to non-911 purposes. The Commission's Fact Sheet states that "between 2012 and 2018, American states and jurisdictions diverted a total of over $1.275 billion in 911 fees to non-911 programs or to the state’s general fund." Annual reports by the Commission call out those states and jurisdictions that apparently misuse fee revenues collected for 911. And the Commission previously has mulled penalties for states that divert 911 fees, including disqualification from grants or other subsidies. Chairman Ajit Pai is to be applauded for circulating the draft Notice. It's a step forward for ensuring that 911 fees are actually used for their stated purpose.   

Roundup of Recent FCC Reform Actions

At its October 25 public meeting, the FCC took a number of actions, including a vote to approve its Effective Competition Order. This order was discussed in My Perspectives from FSF Scholars paper, "FCC Action Would Finally Eliminate Local Cable Rate Regulation." Additionally, the order is the subject of Free State Foundation President Randolph May's Media Advisory from October 4. Given the choice of video services consumers have today, the Commission's grant of relief from the last remains of early 90s-era local cable rate regulation is welcome.

Also at its October 25 public meeting, the Commission voted to approve a declaratory ruling that provides parity and prohibits discriminatory fees on VoIP services. My October 17 blog post discussed that ruling.  

At its September 26 public meeting, the Commission approved an order eliminating forms of access arbitrage involving the intercarrier compensation system. Prior blog posts called attention to that order. 

FCC Proposes to Keep Localities from Exceeding Taxing and Regulatory Limits

On August 1, the FCC will hold a vote on its proposed order to clarify the legal limits on the power of states and local franchising authorities (LFAs) to impose fees on cable operators and to regulate non-cable services. The Commission deserves credit for its proposed order, which is solidly backed by the Communications Act. The Commission's action will keep states and LFAs from weighing down cable operators with multiple, unjustified taxes and charges. And its proposed order also will ensure that broadband Internet services and other information services will be free from state and local state regulatory restrictions. 

To briefly recap, Section 621(a)(1) of the Communications Act recognizes that LFAs may require cable TV service operators to obtain franchises, but subject to limits.Section 622(b), for instance, caps franchise fees on cable operators at 5% of its cable service gross revenues during any 12-month period. And under Section 624(b), LFAs "may not ... establish requirements for video programming or other information services." However, some LFAs have imposed costs that appear to exceed those statutory limits, potentially diverting cable operator resources away from investment in next-generation broadband Internet services. And some uncertainty surrounded whether LFAs might exceed their cable franchising authority to regulate broadband Internet services.   

The Commission's proposed order implements the statutory limits on LFAs in four key respects:

1. By including "in-kind" contributions charged by LFAs in exchange for video franchises within the 5% cap on franchise fees;
2. By concluding that the regulatory jurisdiction of LFAs over video franchising cannot be used to regulate most non-cable services provided over "mixed-use" cable networks, including broadband Internet access services;
3. By preempting any LFA-imposed fees or taxes on cable operators that exceed the Section 622(b) cap as well as any franchising requirements for providing non-cable services through cable networks; and
4. By applying limits regarding LFAactions at the state level and to state regulatory requirements on local franchising.

Free State Foundation President Randolph May and I have previously written about the Commission's Section 621 proceeding and its proposed order in reply comments submitted to the FCC, which the agency cites in its draft order, and also in a pair of blog posts. We urged the Commission to shore up its "in-kind" contribution and "mixed-use" rules and to expressly apply limits on LFAs to the state-level franchising authorities. 

The Commission's proposed Section 621 order is important, and it is commendable. It is faithful to the law, it will keep LFA and state-level franchising actions within proper boundaries, and it's hospitable to encouraging investment and deployment of next-generation broadband services.