Today, I submitted a comment to the Universal Service Fund Working Group.
Few causes in Washington enjoy such bipartisan support as closing the digital divide—in other words, ensuring every American has access to high-speed Internet. The country’s taxpayers have lent generous and unprecedented sums toward this end.
The Infrastructure Investment & Jobs Act (IIJA) alone included $65 billion for broadband deployment and adoption. This came in addition to tens of billions from the American Rescue Plan Act (ARPA) that have already been earmarked for broadband, which added to billions from the CARES Act—not to mention the hundreds of billions across both stimulus bills that could be used for broadband.
No government spending program or initiative can be so well intended that it rises above oversight, scrutiny, and reevaluation. With so much money at stake, it is essential that Congress measure the effectiveness of these programs and consider reforms that optimize outcomes and prevent wasteful spending. Taxpayers should expect nothing less.
Senators Ben Ray Lujan (D-NM) and John Thune (R-SD) should therefore be commended for examining the state of the approximately $9 billion per-year Universal Service Fund (USF), administered by the Federal Communications Commission (FCC), that supports rural broadband, Internet in schools and hospitals, and phone service affordability.
Congress Should Get Clarity on Future Broadband Spending Needs
Notably, USF is just one piece of a web of more than 100 federal programs, administered by 15 agencies, that could be used to expand access, according to a Government Accountability Office (GAO) report. But USF is unique in that it is funded by a fee on consumers’ phone bills, a necessarily regressive tax that burdens seniors and low-income Americans. So it is especially important that Congress ensure that the program is effective, sustainable, and guarded against abuse and fraud.
As part of its review of USF, Congress should take a hard look at the anticipated needs of this and other broadband programs going forward. Even before the spigot of funds from the COVID-era stimulus and infrastructure bills, federal broadband funding was a “fragmented, overlapping patchwork,” GAO found.
For instance, the Department of Agriculture’s (USDA) ReConnect program has been a source of waste and duplication, due to inconsistent standards and a lack of coordination with other programs and agencies, especially the FCC. For several years, as former FCC Commissioner Mike O’Rielly notes, Congress has extended the program without needed guardrails and oversight. Congress could improve the program by passing the Rural Internet Improvement Act, which would ensure that funds are directed at truly unserved Americans by limiting funds to projects in areas where at least 90 percent of the households lack sufficient access to broadband services.
This would not only make ReConnect more effective at its goal of increasing connectivity, but would also lessen the load on programs such as USF by ensuring that they don’t waste funds on the same areas covered by USDA. In general, reining in the excesses of non-USF broadband programs such as ReConnect will put USF on sounder footing.
Despite the patchwork, USF for many years was the primary vehicle for supporting rural broadband deployment. American taxpayers have spent billions on high-cost programs, including legacy programs such as Connect America Fund Broadband Loop Support (CAF-BLS) and Alternative Connect America Model (A-CAM) that support rural telephone companies. Those legacy programs include not only funds to upgrade service in telephone companies’ historic service areas, but also ongoing subsidies for the operating expenses of those carriers. Rural telephone companies are guaranteed this support—sometimes indefinitely—without any opportunity for other providers to compete for that funding. In an era when more than $100 billion in non-USF funding is being spent on broadband initiatives, Congress should ask serious questions about the wisdom of funding networks that require indefinite maintenance subsidies.
There is already cause for concern that subsidized broadband operational expenditures will become a growing, perpetual boondoggle. Before the IIJA’s $42.5 billion Broadband Equity, Access and Deployment (BEAD) program has even wired a single dollar to a single grant recipient, some broadband interests are already asking American taxpayers to subsidize these newly deployed networks in perpetuity. In a filing with the FCC, the Rural Wireless Association told the agency it should use USF to support the operational expenditures of networks funded by BEAD and other programs. NTCA, a trade group that represents rural telecommunications companies, similarly warns that BEAD-funded networks won’t be sustainable without perpetual subsidies. Christopher Ali, a telecom professor at Penn State University, argues that rural broadband will always be a market failure in need of indefinite taxpayer support. Yet, in the same breath, he encourages BEAD grants to be sent to municipally and cooperatively owned networks that are least likely to be self-sufficient and most likely to require ongoing taxpayer support in the first place. Lamenting the difficult economics of rural broadband while promoting poorly equipped entities to build networks is a recipe for fiscal disaster.
American taxpayers are already shouldering a $100 billion-plus burden to bridge the digital divide—not to mention the tens of billions they have already put toward the effort in prior years. Congress and the administrators of broadband programs, including states and localities, should look skeptically on those entities asking for more money before shovels even hit the ground. Grant managers should instead prioritize carriers who can stand on their own two feet without future assistance from taxpayers.
National Telecommunications and Information Administration (NTIA) Administrator Alan Davidson has rightfully described the BEAD program as a “once in a generation opportunity.” Let’s ensure it does not become an opportunity to condemn every future generation to endless USF debt.
Rethinking How We Fund USF
Consolidating programs and limiting future liabilities in the grant-making process for BEAD, ReConnect, and other congressionally appropriated broadband programs will help reduce the strain on USF and its ratepayers. Nonetheless, USF will likely continue for the foreseeable future, barring a court finding the program unconstitutional.
Congress and the FCC are under increasing pressure to reform how USF is funded. As landline telephone revenues have cratered in the digital age, the pool of contributors has shrunk. At the same time, USF has long shifted from primarily supporting telephone service to primarily supporting Internet access, and the demands have increased in recent years as it became more imperative and urgent to bring connectivity to rural homes, small businesses, and healthcare facilities. With a declining contributor base, and increasing demands on USF, American ratepayers have seen their fee grow from roughly 5 percent in the year 2000 to nearly 30 percent in our current fiscal quarter.
The growth in the contribution factor has led many to advocate for a harmful solution: taxing Americans’ broadband bills. Assessing broadband would directly undermine the goal of boosting broadband adoption, as research shows that price can be a significant factor in why low-income Americans forego home broadband service. One study shows that taxing broadband would increase consumers’ share of USF payments from 30 percent to 70 percent. Another study estimates that such an assessment could increase monthly broadband bills by $5.28–17.96 per month.
Increasing the burden on consumers who are already paying for USF through a regressive tax is the opposite of what Congress and the FCC should be doing. Instead, they should be working to shift the burden of USF onto enterprises and business-to-business transactions.
Furthermore, the federal government acknowledges that taxing broadband directly is antithetical to the goal of boosting broadband adoption. The Permanent Internet Tax Freedom Act (PITFA), which was signed by President Obama in 2016 and enjoyed overwhelming bipartisan support, bars state and local governments from taxing the internet in no small part to protect customers from government-caused price hikes. Using USF to assess broadband directly would clearly violate the spirit of PITFA and represent a complete 180 in the federal government’s thinking about taxing broadband.
While one may argue that USF is funded through “fees” rather than “taxes,” that is a distinction without a difference for the consumers who pay the price. And one notable and important irony is that NTCA is one of the loudest voices advocating a broadband tax while simultaneously advocating broadband policies that would increase the cost of USF. A cynic might view such a position as self-serving—preaching prophecies of endless need while asking individual taxpayers to cover the forecasted subsidies.
The good news for consumers is that the FCC is leaning against assessing broadband. As FCC Commissioner Brendan Carr noted in his statement on the FCC’s report on the future of USF, the agency threw “cold water” on a broadband tax. The report was also right to note broad support for a different path forward to reducing the cost of USF on consumers: requiring Big Tech companies, who are the indirect beneficiaries of all broadband subsidy programs, to contribute to the vital national goal of universal connectivity.
As the Web 2.0 Internet became more consolidated, the edge revenues from newly connected Americans started flowing to a smaller and smaller group of companies. A 2022 Sandvine report found that Google, Meta, Netflix, Apple, Amazon, and Microsoft account for nearly 57 percent of Internet traffic. Given this fact, many stakeholders have advocated for taxes on video streaming services and/or digital advertising to pay for USF.
The problem with a “Netflix tax” is that it would simply be passed entirely onto consumers in the form of an increased bill, perpetuating the regressive nature of USF that Congress seeks to address. While a digital ad tax would draw on a much larger pool of U.S. revenue, a number north of $200 billion that dwarfs traditional telecom service revenues, digital advertising platforms can credibly argue that it singles out ad-supported Internet business models.
Congress should seek a solution that increases the contribution base, shifts the burden from consumers onto enterprises (particularly the indirect beneficiaries of USF such as Big Tech companies), and is forward-looking in terms of where large Internet-enabled revenues will be for the foreseeable future. By skating to where the puck is going, Congress can avoid a repeat of our current predicament of drawing on a rapidly declining revenue base to pay for USF. So where can Congress find a broad base of support that doesn’t single out particular Internet use cases and ensures a wide cross section of the economy has skin in the game?
Cloud Computing as a Potential Contribution Base
The cloud services market in the U.S. is expected to reach nearly $260 billion in revenue in 2023. That figure is set to skyrocket to almost $400 billion by 2027. Buoyed by the artificial intelligence boom, market leaders Amazon, Microsoft, and Google are set to reap the rewards of AI’s computing needs. A 2019 report from RightScale found that more than 90 percent of companies are using public cloud services such as Amazon Web Services and Microsoft Azure. While video streaming services are major cloud users, the technology is widespread across a range of industries, from banking and insurance to retail and healthcare.
As businesses across economic sectors increasingly adopt AI and cloud services, those revenues will grow as will the need for broadband networks to upgrade and keep pace with ever-growing bandwidth and computing needs. To the extent that USF will play a role in upgrading and maintaining networks to meet future demands, cloud computing will be a key driver of those demands. And given the ubiquity of cloud services, and their criticality in how the modern Internet functions, they should increasingly be seen as comprising an infrastructure layer of the Internet stack.
As Congress considers the future of USF, legislators should strongly consider granting the FCC the authority to assess cloud computing. It would drastically reduce, if not eliminate, the burden on individual consumers, ensure the Big Tech companies who have been indirectly subsidized by USF are contributing to universal connectivity, broaden the base to large swaths of the enterprise digital economy, and put USF on sound footing with a forward-looking contribution base that is poised to enjoy exponential growth in the years to come, fueled by artificial intelligence.
Just as the USF working group considers a range of options for funding from broadband assessments to streaming services to digital ads, there are unique challenges with implementing any of these mechanisms as there would be with cloud computing. How does one distinguish between public and private cloud infrastructure? How would the FCC meter usage? These and other questions are worthy of careful consideration.
Conclusion
The future of USF requires Congress and the FCC to take a holistic look at the current state of federal broadband spending, determine future needs, and consider the impact and responsibilities of edge software providers in the broadband ecosystem. Before committing taxpayers to future expenditures, Congress and the FCC should heed GAO’s recommendations and work to streamline and consolidate broadband programs to guard against waste and duplication. Parallel with that careful assessment, lawmakers should determine a sustainable, forward-looking funding mechanism for USF that broadens the base, minimizes the burden on individual consumers, and avoids regressive and counter-productive ideas like taxing broadband. Congress should then give the FCC the authority it needs to implement what will hopefully be a much brighter future for USF.
