Where the Free Press Got it Wrong on Broadband “Tax”

I don’t always agree with the Free Press. But even when my interpretation of facts differs, I’ve usually found the information the group puts forth to be credible – that is until a recent op-ed piece titled “Taxing Broadband – An Idea Whose Time has Not Come,” that ran on the Ars Technica site.

In the piece, the Free Press research director argues that the high-cost Universal Service program, which helps cover part of the cost of delivering communications services to rural areas, is a “corporate slush fund.” To back up his position, he cites two studies that have been demonstrated to be inaccurate.

He references a “2010 audit of the rural USF program [which] found that one out of every four dollars sent to participating phone companies was an ‘overpayment.’” But if you read the audit (which was actually done in 2008), you will find that if a phone company was missing any documentation for the USF monies it collected, the auditors assumed all payments to that telco were an overpayment. I spent a considerable amount of time going through the numbers when they came out – and I estimated that it was unlikely that telcos had been overpaid by more than 4% or 5%— if that.

The Free Press research director also cites a 2011 report from the Technology Policy Institute that found that 59 cents of every USF dollar was spent on administrative expenses and general overhead – another finding that has been debunked. Several rural telco associations noted that the Technology Policy Institute report author apparently assumed (incorrectly) that all of a small telco’s general and administrative expenses were covered through the high-cost USF program. Pointing to FCC data, the small telco groups said small telcos’ corporate expenses comprised more like 13% of high-cost support.

Proposed reforms
The Free Press op-ed piece was not primarily about today’s USF program, however, but instead was an attempt to alert readers to an impending “tax” on Internet connections, which the author said would send “even more of your hard-earned money to the government for corporate welfare.” And I have to challenge that assertion as well.

At issue is the FCC’s plan to transition today’s voice-focused high-cost Universal Service program to one focused instead on broadband. As that transition is made, the commission also is reconsidering how the program should be funded. Currently it is funded by service providers as a percentage of long-distance voice revenues, but the commission is considering collecting at least some of the funding as a percentage of broadband revenues. Service providers typically pass these kinds of costs on to their customers – and that approach is what the Free Press research director is calling a “tax.”

What the op-ed piece doesn’t explain is that the FCC isn’t planning to increase the total amount of funding collected. The commission has made it very clear that the goals of the broadband program must be met without increasing the fund size.

The change in funding methodology is being considered because as long-distance revenues decline, it has become increasingly impractical to collect money from the service providers as a percentage of those revenues. And while it may have made sense to fund a voice-focused program by collecting money based on voice revenues, it doesn’t make much sense to fund a broadband program in that manner.
Here’s another way of looking at this:

In the initial decades of the Universal Service program, virtually 100% of a consumer’s monthly communications spending went toward voice, but over time, spending on voice has declined and a large part of that spending has shifted toward broadband. Instead of collecting Universal Service funding based on a high percentage of long-distance voice revenues, policymakers are looking to collect at least part of the funding from broadband revenues.

To say that consumers will be “sending more of their hard earned money to the government” is not correct. The total amount sent is not supposed to change.

Is one tax better than another?
It’s worth noting that the Free Press op-ed piece does not argue against non-rural Americans helping to pay part of the cost of bringing broadband to rural America. Instead the author argues that the broadband program should be funded through general treasury revenues. Apparently the author isn’t against paying for the program through taxes; he just doesn’t want those “taxes” to come from broadband.

The idea of raising Universal Service funding from general treasury revenues isn’t necessarily a bad one. But as the author notes, that move would require action by Congress – and pragmatically that means it’s unlikely to happen any time soon if ever.

I think an argument also could be made that it’s not unreasonable for users of broadband to help pay for universal broadband because they are the ones most likely to benefit from expanded broadband availability (the Metcalfe’s Law affect).

I might feel differently if consumers weren’t already paying for Universal Service through their monthly communications service bills. But they are – and if, hypothetically, we were to scrap that whole idea, that doesn’t mean the phone companies would lower everyone’s costs dollar for dollar. Once people get used to paying a certain amount for services, the providers of those services often find a way to continue to collect the monies in question.

Given that reality, I’d prefer to see those dollars go toward making broadband available to all Americans rather than seeing them simply flow through toward telcos’ bottom line.

Updated Sept. 7