The Universal Service Fund: now more universal taxation

In theory at least, some of what the Universal Service Fund is being used for is good to do and has a connection to the funding source. But like many things, theory and practice can be rather far apart.

Making the situation worse, the FCC has just noticed that the rate money is going into the USF is falling behind the rate it is being spent, and has decided to implement a temporary way to throw more of our money into the pot.

The USF was established with an abundance of good intentions to “promote the availability of quality services at just, reasonable, and affordable rates; increase access to advanced telecommunications services throughout the Nation; [and] advance the availability of such services to all consumers, including those in low income, rural, insular, and high-cost areas at rates that are reasonably comparable to those charged in urban areas” (for more click here). The money came from a tax on long-distance and international phone calls. It makes some sense to tax some types of phone calls to ensure that people all over the United States can get phone service.

But the use of the USF was expanded in the late 1990s to subsidize Internet service to schools, libraries and rural heath centers. Clearly these are worthy causes but it’s hard to see the justice in taxing phone calls to subsidize Internet service — sort of like taxing newspapers in order to subsidize go-carts. The USF is just a convenient pile of money.

A few months ago the FCC decided to deregulate DSL services. One impact of that decision was that DSL lines were no longer taxed for the USF. Now the FCC is scrambling to replace that money at a time when the USF continues to spend more money — about $6.5 billion in 2005, up from $4.4 billion in 2000. As an interim solution they now have decided to extract more money from cell phone users and start taxing many VoIP users (see the new FCC rule). This new rule needs to be an interim solution because it’s hard to extract money from long-distance users fast enough to keep the USF filled.

One side impact of the new rule is that all “interconnected VoIP providers” (those with which one can call to and from the PSTN — see pp 36 of the new FCC rule) must register with the FCC and hire some company in Washington, D.C., to deal with FCC paperwork. This requirement applies even to those VoIP providers whose revenue is below the threshold where they would be required to send money to the USF. This is the first time that I know of where everyone providing some type of Internet-based service in the United States is required to register with the government — not a good precedent.

It’s hard to tell how much money would be needed by the USF if its purpose was to get phone service to rural Alaska — which is the excuse for continuing the USF given by two FCC commissioners — and other underserved locations. But we are not likely to find out: Politicians and the FCC will continue to use this tax (now more than 10%) for things unrelated to phone service — good things (maybe), but not things to tax phone bills for.

Disclaimer: Good things (maybe) is a common refrain about Harvard’s activities, but the university has not expressed an opinion about the USF, I just have.

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