Rural broadband subsidy programs are a failure. We need to fix them.
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On March 1, the Senate held a hearing focused heavily on subsidies for rural broadband. Given that the witness list included only those with an interest in receiving money and the general excitement surrounding the possibility of even more funding from Washington, you would be forgiven for thinking that rural broadband has been neglected.

The facts, however, show otherwise.

First, rural broadband coverage is not as bad as proponents of additional spending claim. In fact, it's pretty good. The National Broadband Map shows that by June 2014, 96 percent of rural households had access to broadband offering at least 10 megabits per second (Mbps) download speeds, which is the minimum required to participate in the Federal Communication Commission's (FCC) universal service program. If you include satellite broadband coverage, that goes up to almost 100 percent.

Second, we already heavily subsidize rural broadband. The Connect America Fund (CAF), run by the Federal Communications Commission, subsidizes rural Internet Service Providers to the tune of $4.5 billion per year. Since 1995 the program has spent $84 billion in real dollars subsidizing rural telecommunications providers. In addition, the Department of Agriculture's Rural Utility Service (RUS) has given out another $7 billion since 2009 in grants and loans for telecom programs. The National Telecommunications and Information Agency gave away another $4 billion as part of the 2009 stimulus package. Policymakers might ask what we've gotten from that nearly $100 billion.

Third, analysis after analysis finds that the universal service subsidies have had no effect on rural penetration, while government reports find that the program is not transparent and consistently avoids evaluation. In earlier research, I found that about 60 percent of subsidies went to rural providers' overhead rather than to investment. The RUS, meanwhile, makes so little data available publicly that it is impossible to know whether their programs work. The Government Accountability Office helpfully suggested in the title of a 2014 analysis that "USDA should evaluate the performance of the rural broadband loan program."

And if all that doesn't grind your gears, consider where these subsidies come from: you.

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The CAF is funded by a tax on certain telecommunications services. But rather than basing the subsidy on available funds, the tax rate consumers face varies based on what rural providers demand. The tax rate this quarter is 16.7 percent. If you're thinking that might be OK if it at least transfers money from the rich to the poor, you'd be wrong because it is highly regressive. Everyone, including low-income people, pays the same tax rate. In other words, low-income people in urban areas pay a tax that benefits rural internet service providers (ISPs) — even in wealthy areas like Aspen, Colorado and Jackson Hole, Wyoming.

 

In spite of all those problems with the current universal service programs, as a society we have decided that we want to ensure that all residents have access to the internet and some areas are too remote or otherwise too costly to justify private investment.

Providing such access requires being smart and transparent about how we distribute subsidies. To minimize the negative effects from collecting the taxes that are then redistributed it is important that a program be as cost-effective as possible. The CAF, if anything, encourages the opposite behavior.

Rather than a hard budget, the rules require the program to collect at least $4.5 billion every year. In other words, the FCC is not allowed to collect less from consumers even if they don't distribute it. (Find this hard to believe? Check out paragraph 560 in the order). If the FCC distributes less than $4.5 billion then it squirrels away the remainder in a slush fund.

A cost-effective subsidy program should provide funds first where they will yield the largest bang for the buck and last where they yield the smallest. Any subsidy program should be subject to evaluation and experimentation to ensure the best outcome, but in general we should distribute subsidies via a procurement-like process that governments and businesses use every day.

In this case, the government would define the network services it believes everyone should have (hopefully based on a careful analysis of both supply and demand information) and geographic areas it wants covered, and ask companies to say the size of the subsidy they would need to build out in those areas. A group of 71 economists signed a letter in 2009 encouraging this type of approach. It would then be possible to make an objective choice about which projects receive subsidies and which do not.

It is good that Congress and others are taking a fresh look at rural broadband subsidies. But that should not simply mean more money for the same wasteful programs. Instead, we should take this opportunity to rethink universal service and implement new ways of promoting coverage where it does not exist so that it benefits consumers, not just rural ISPs.

Scott Wallsten is president and senior fellow at the Technology Policy Institute, a think tank that focuses on the economics of innovation, technological change and related regulation in the U.S. and around the world.


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