FCC Hits Consumers With New Year's USF Tax Hike

Seth L. Cooper

Starting 2016, consumers must pay an 18.2% surcharge on part of their phone bills. The surcharges pay into the Universal Service Fund (USF), a multi-billion-dollar subsidy system.

Functionally, USF surcharges are taxes. But the FCC doesn't call them "taxes" because the rate is assessed and the money collected and spent outside the control and accountability of Congress. Apparently, labeling USF taxes "surcharges" is the FCC's way of dodging the constitutional maxim of "no taxation without representation."

USF surcharges appear as a line item on consumers' monthly bills for voice services. The surcharge rate - 18.2% - is assessed against the interstate long distance portion of those services. The money is remitted to an entity established by the FCC to administer the USF program. In 2014 alone, money paid into the USF program was given to:

- voice providers in rural or high-cost areas - $3.75 billion;

- schools and libraries - $2.27 billion;

- health care facilities - $193 million;

- voice providers serving low-income consumers - $1.6 billion.

Not to be overlooked are the expenses incurred by the FCC-established entity established to administer the USF program - nearly $119 million in 2014.

Over the last several years the USF subsidy system has snowballed in size. 2014 USF disbursements total over $7.8 billion, marking a significant increase from 2000 USF spending of $4.0 billion. Corresponding to climbing USF subsidy spending are climbing USF surcharge rates. The following pair of charts shows the unmistakably upward march in the effective tax rate on consumers.

As further explained in my blog post, "USF Surcharge Hikes Hit Over-Taxed Wireless Consumers Hardest," the FCC generally treats 37.1% of a wireless consumer's calling plan as the interstate long distance portion subject to USF surcharges. Wireless consumers face a tax pile up from multiple state and local wireless taxes, fees, and surcharges. Often, wireless services are taxed at higher rates than general sales tax rates. Federal USF surcharges heighten the problem of wireless consumer over-taxation.

Plans for future increases in USF subsidies further heighten concerns for taxpaying consumers. For example, the E-Rate Modernization Order (2014) authorized a $1.5 billion annual increase in school-related subsidies. Consumers must ultimately pay for such USF subsidy increases. As the FCC looks to direct USF subsidies to certain broadband services and "experiments," Chairman Tom Wheeler has not ruled out the possibility of subjecting broadband consumers to USF surcharges - in effect, a USF "Internet tax."

Going forward, the FCC needs to make consumers a priority by reducing the burden of USF surcharges. It also needs to resist the bad idea of imposing USF surcharges on consumers of broadband services. For starters, the FCC must take steps to reduce the overall size of the USF program, especially the high cost fund. And it must resist the temptation to make grand new USF subsidy giveaways from the pockets of consumers.

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