Politics & Policy

A Universal Waste of Money

Time to unplug the USF.

In the waning hours of the 108th Congress, the Senate voted to pass legislation amending the National Telecommunications and Information Organization Act. Contained in the bill was a last-minute provision to force the release of previously obligated dollars from the Universal Service Fund (USF), which had been frozen due to a September decision by the FCC to subject it to the federal Anti-Deficiency Act (ADA). So what’s behind this jumble of acronyms? An ongoing battle over federal spending in which taxpayers just narrowly dodged a costly bullet. But the shooting hasn’t stopped yet.

The Universal Service Fund is a federal creation that uses mandatory fees (i.e., taxes) collected from telecommunications companies to subsidize services for low-income and rural customers as well as eligible schools, libraries, and rural health care providers. Conservatives call the portion of the USF given to eligible schools and libraries the “Gore tax,” after its proponent Al Gore.

The scheduled distributions were halted because the ADA prohibits federal agencies from incurring financial obligations in excess of money on hand. However, because the USF did obligate more money than it had on hand, an immediate hike in contributions from subsidizing telecom companies would have been necessary to cover the shortfall and unfreeze the funds. Given that subsidizing telecom companies recoup these USF fees from their customers, the FCC’s decision — albeit worthy — would have meant a huge increase in consumer landline and wireless telephone bills.

Although this situation was avoided, it served as one more glaring example of why the USF needs to be done away with entirely.

Most free-market advocates have long considered the USF to be little more than an inefficient tax and redistribution scheme. It is difficult to understand why one subset of the population (urban residents) should be forced to subsidize the telecommunications services of another (rural residents). Beyond the higher costs (both economic and social) of living in an urban area relative to a rural area, the simple fact is that people in rural areas choose to live there. Besides, why should a single mother in New York City have to subsidize phone service for a wealthy rancher living in Montana?

But the problem with the USF goes beyond mere principle. The rural companies that ultimately provide these services are direct beneficiaries as well. Advocates of the USF maintain that such a tax-and-transfer mechanism is necessary to induce companies to provide telecom services in these naturally costly areas. Yet, evidence continues to mount that precisely the opposite is true. As the Cato Institute’s Adam Thierer has noted, “the best universal services policy is a good competition policy” — not continued maintenance of the USF.

In reality, generous government subsidies — $14 billion in the last eight years — discourage recipient companies from economizing and help keep competition out. A recent USA Today article cited the example of Big Bend Telephone, which serves 6,000 customers in Alpine, Texas. Last year Big Bend spent $3.6 million — or 25 percent of total operating costs — on corporate overhead alone. At the same time, the company received $9.6 million and $3.3 million in federal and state universal service funds, respectively.

One can also point to the program’s documented history of fraud and inefficiency. The same USA Today article on the USF noted that the Gambino crime family “was able to fraudulently draw millions from the universal service fund from 1996 to 2003 by controlling a Missouri rural phone firm.”

Finally, earlier this month the rationale for the “Gore tax” portion of the USF was severely undermined when a new study of recent international test scores revealed that students who frequently utilize computers at school tend to perform worse than their peers in math and reading. Even more incriminating was the news that the same international examination ranked American students 24th out of 29 industrialized countries in math.

Now the FCC is proposing that the USF “contribution” factor, which is the percentage of “interstate end-user revenues” telecommunication companies must pony up (and that consumers ultimately pay for) should rise from 8.9 percent to 10.7 percent. This proposed tax hike was precipitated by the Universal Service Administrative Company’s projection that millions more dollars would be needed for the USF next year. Thus it appears USF’s burdens and blunders will only grow.

Legislators and regulators will likely take up reform of the Universal Service Fund in the coming year, but the program’s bipartisan political supporters will fight hard to insulate it from complete termination. As FCC chairman Michael Powell recently said, “Universal Service is not an economic policy; it’s a social policy.” Yes, and it’s also a waste of money.

–Tad DeHaven is an economic policy analyst with the National Taxpayers Union.

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