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Economists Advise a Budget for Universal Service Fund

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The Universal Service Fund (USF) has spent over $175 billion in real dollars over the past two decades subsidizing telecommunications services. Scott Wallsten and Sarah Oh, Senior Fellows at the Technology Policy Institute, argue in a filing to the Federal Communications Commission (FCC) that the Universal Service Fund (USF) should be subject to a budget cap. “The Fund largely operates without a budget cap. Instead, the FCC estimates how much providers will ‘need’ in order to provide services,” Wallsten and Oh write. Wallsten and Oh describe the problem: “Without a budget constraint, recipients and program managers have little incentive to ensure efficient use of resources.”

Wallsten and Oh also note that the FCC should not routinely collect more money than it distributes. Primarily since 2011, the USF has been accumulating surplus funds, partly due to a rule that requires it to forecast distributions to the Connect America Fund of at least $4.5 billion per year.

The lack of a budget is problematic not just because of the incentives it creates for the inefficiency and continued spending, but because of the regressive fee structure for the collections that support the program. Taxes are levied on services such as calling cards and mobile service, regardless of the income-level of the consumer. The tax, or “contribution rate,” as the FCC prefers to call it, on these services continues to increase, most recently reaching 24.4 percent, 340 percent higher than it was in 2000.

In its Notice of Proposed Rulemaking, the FCC also asked whether to a budget should be indexed to inflation. Wallsten and Oh recommend the FCC rely not on a general Consumer Price Index, but on indices of the prices of relevant goods and services such as telecommunications networking equipment and telecommunications services. Real price changes in different goods and services have diverged widely in recent years with childcare, healthcare, and education, for example, increasing and real prices of broadband equipment decreasing.

While commending the FCC for introducing tools that promote efficient allocations of subsidies, like reverse auctions, Wallsten and Oh also note the importance of building evaluation into the USF. They suggest that the FCC’s Office of Economics and Analytics make evaluating USF a priority, including developing a coherent method of allocating funds across USF programs.

Wallsten and Oh conclude by saying, “A budget cap will create incentives for the entire USF community to assess the program, experiment with new methods of distributing funds such as reverse auctions, and find ways to get more bang for the subsidy buck.”

Read Wallsten and Oh’s full comments here.