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Unrepentent Policy Failure: Universal Service Subsidies in Voice and Broadband
  • Thomas Hazlett, George Mason University
  • Scott J. Wallsten

In the first half of 2013, the Universal Service Fund levied a nearly 16 percent tax on users of fixed, mobile, and VoIP communications, spending nearly $9 billion to extend networks. Yet, USF expenditures – about $110 billion (in 2013 dollars) since 1998, of which $64 billion went for telephone carrier subsidies – extend voice services to, at most, one-half of one percent of U.S. households. This generous estimate of about 600,000 residences implies a cost-per-home of $106,000, just counting the federal carrier subsidies. Entrenched interests make the program exceedingly difficult to change. These interests include hundreds of rural telephone companies, inefficiently small and opportunistically expensive because funds are paid out according to cost- plus criteria. Some carriers receive more than $10,000 per line per year to support voice service. Yet, FCC data show that mobile voice service is available to 99.9 percent of households and wireless broadband service to over 99.5% of the U.S. population, including 97.8 percent of rural residences. In addition, satellite systems supply voice and data services to households virtually everywhere people live in the United States, using networks built without subsidies. Even with subsidized lines, subscribers typically pay $400 a year or more just for voice service. While some USF dollars help low-income subscribers pay their bills, 80% of poor households receive no subsidies and yet pay the USF tax. Studies, including several by the Government Accountability Office (GAO), have repeatedly revealed USF waste, fraud and abuse. The Federal Communications Commission (FCC) issued a 751-page Order in late 2011 purporting to deal with part of the situation, but rather than fixing fundamental problems the FCC Order extends subsidies from voice to broadband and mandates increases in payments to carriers. Even when attempting to rein in costs, the Order applies Band-Aids where tourniquets are needed. Emblematic of the new rules is a measure to limit subsidies to rural carriers to $3,000 per line per year. This laughably spacious ceiling – in a day when satellite voice-and-broadband service is offered to virtually every U.S. household for $600 a year -- will fail to remedy the endemic waste in the USF. Instead, it targets the ―headline risk‖ policy makers now face when grotesquely profligate industry payments are made public. Most critically, the FCC provides a new rationale for subsidies – substituting ―broadband‖ for ―voice‖ – breathing renewed political life into a failed government initiative that taxes urban phone users, most heavily poor households who use wireless phones and make long-distance (including international) calls, in order to subsidize phone companies and property owners in rural markets. Indeed, the reform‘s first effects were to increase the High Cost Fund by about $400 million. Upon examination, the fig leaf of ―public interest‖ for this transfer wilts. Any plausible cost-benefit test reveals that economic welfare would increase were the entire $9 billion per year USF program eliminated.

  • universal service,
  • broadband,
  • subsidies,
  • regulation,
  • telecommunications
Publication Date
June, 2013
Citation Information
Thomas Hazlett and Scott J. Wallsten. "Unrepentent Policy Failure: Universal Service Subsidies in Voice and Broadband" (2013)
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