Telephone tax is overdue for reform

Most telephone users don’t know they are paying into a billion-dollar fund that is used to subsidize phone service for rural telephone service. While it is likely that most would support the original purpose of such a fund, I doubt many would support the incredible growth in payments from this fund we have seen recently. The Federal Communications Commission is considering a cap in the next several weeks on such payments in order to sort this matter out. This is exactly what telephone users need in order to be assured their tax dollars are being used wisely.

A truism in Washington is that good intentions do not necessarily produce good policy. We can all think of some government program that was intended to alleviate some pressing social need but went awry. The Universal Service Fund is in danger of going down this well-worn path.

The USF was formed 10 years ago, funded by a tax on services like long-distance telephone service, with the goal of bringing affordable telecommunications and information services to consumers in “rural, insular and high-cost areas.” It’s actually made up of four separate funds, with the largest (and most controversial) being the appropriately named “high-cost” fund. This program pays money directly to companies doing business in rural areas where making service available is expensive.

That was fine at first, but recent payments to wireless companies in these areas have skyrocketed. Because wireless companies are compensated per customer, they collect an additional payment for every new client they sign up. If the new cellular customer keeps his landline, both companies get a subsidy. If he drops the landline and keeps the cellular service, the landline subsidy goes up. Higher landline subsidies raise the cell carrier’s compensation, because rates are based on the incumbent’s per-customer subsidy. And sometimes there are multiple cell providers in each area. It can add up to hundreds of dollars per customer per month.

Not surprisingly, this is getting expensive. Payments have gone from $15 million in 2001 to $131 million in 2003 to an estimated $1 billion this year. All this is bankrolled by the American telephone subscriber — you and me.

Worst of all, the USF is not even accomplishing its goal.

Two separate studies by Criterion Economics found that unsubsidized carriers actually do a better job of providing service than subsidized ones. Unsubsidized providers cover 97 percent of the population in areas that have subsidized providers, while the subsidized ones cover only about 70 percent. They discovered virtually no statistical correlation between subsidies paid and expanded wireless coverage.

Most people want to see a cap on this part of the USF. If some kind of action isn’t taken soon, the program’s exponential growth will outpace consumers’ ability to fund it.

The Federal-State Joint Board on Universal Service has recommended an interim cap on the high-cost portion of the Universal Service Fund going to wireless carriers, and a vote is expected in the next several weeks.

The point is this: This originally well-intentioned government program has failed to adapt to changing technology and, as a result, is costing taxpayers a fortune while failing to deliver on its promises. An interim cap is the first step toward getting the USF under control.

McIntyre is chairwoman of Communications Consumers United.