Tax-happy feds should simply quit meddling

It never rains but it pours: The feds are back on the telecom tax bandwagon.

Last week I wrote about the long-overdue repeal of a portion of the Federal Excise Tax, which levied a 3% luxury tax on phone services. The good news? The long-distance portion of the FET is finally going away. The bad news? The Treasury Department fought tooth and nail to keep that from happening (and indeed, will continue to collect FET on local calls).

At its June 15 meeting, the FCC expects to assess a proposal to expand the Universal Services Fund (USF) taxes to VoIP providers such as Vonage, increasing the typical customer's bill by about 7%, or $1.77 per month, on a $25 per month flat-rate bill.

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It never rains but it pours: The feds are back on the telecom tax bandwagon.

Last week I wrote about the long-overdue repeal of a portion of the Federal Excise Tax, which levied a 3% luxury tax on phone services. The good news? The long-distance portion of the FET is finally going away. The bad news? The Treasury Department fought tooth and nail to keep that from happening (and indeed, will continue to collect FET on local calls).

At its June 15 meeting, the FCC expects to assess a proposal to expand the Universal Services Fund (USF) taxes to VoIP providers such as Vonage, increasing the typical customer's bill by about 7%, or $1.77 per month, on a $25 per month flat-rate bill.

There are a couple of perspectives on all this. First, taxes shouldn't discriminate by technology - otherwise, you're distorting the free market. Making some technologies artificially expensive by taxing them - or alternatively, artificially inexpensive by not taxing them - amounts to asking the government, not the market, to choose winners and losers. By this logic, VoIP providers should pay USF charges just like TDM providers.

But the USF is an unmitigated disaster. It's badly managed and ineffective. Supporters claim it's necessary to enable universal broadband, but as currently configured the USF doesn't do that. Moreover, the definition of what is and isn't broadband, for USF purposes, is remarkably malleable.

At the moment, for example, DSL isn't considered broadband. The current taxincrease proposal is on the table in part to address a $350 million shortfall in the USF, which resulted from a decision last year to declassify DSL as a telecommunications service and thus exempt DSL providers from paying into the fund.

In other words, DSL doesn't count as a telecom service - except when it does. Even as VoIP is getting reclassified (and taxed) as a telecom service, Sen. Ted Stevens (R-Alaska), is proposing a bill requiring carriers that receive USF money for a particular community must offer broadband service within five years. In other words, DSL is a telecommunications service for the recipients of USF funds, but not for the donors. Confused yet?

And that's not all. As I've noted in several previous columns, instead of funding telecom services for the needy, the USF has been coopted to pay for cell phone services to billionaires or fooled into payouts to mobsters. Last month, the former president of the Missouri-based Cass County Telephone company was sentenced in federal court to jail time for his role in an organized-crime conspiracy to bilk the USF of millions of dollars between January 1998 and July 2004.

Clearly, the USF isn't getting the job done. And last time I checked, throwing more money at a bad solution doesn't make things better.

So here's a radical idea: Instead of taxing VoIP providers right along with traditional telcos, how about scrapping the entire dysfunctional USF in the first place? If need be, we can build out some flavor of telecom subsidy that actually works - but the USF isn't it.

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