Commentary

Joint Statement On The New FCC 5 Billion Tax And Entitlement Program

May 8, 1997

On Wednesday, May 7, the Federal Communications Commission (FCC) is expected to announce rules for universal service funding programs, establishing one of the largest new federal spending programs in decades. Unless the plans now reportedly under consideration by the FCC are radically changed, the programs would hurt - rather than help - telecommunications consumers and slow the progress of the information revolution.

The programs, authorized last year by the Telecommunications Act of 1996, will provide special discounts to certain types of telecommunications subscribers, including schools, libraries, health care providers and low-income subscribers. They will also allow rural areas to continue to receive service at below-cost rates. The cost of the subsidies will be paid for with new fees, to be assessed by the FCC, on telecommunications services.

The total cost of these funding programs has not yet been determined. Some analysts have estimated funding levels of approximately $5 billion per year, including about $2.5 to 3 billion for schools, libraries and health care providers alone. To put the total figure in context, $5 billion is almost the total annual outlay for federal farm subsidies or the Environmental Protection Agency. In current dollars, it approximates the total federal cost of Medicaid in that program’s first year.

Unlike other federal spending programs, these programs will be established not by Congress, but by the FCC, an independent federal regulatory commission. As a result, the costs and expenditures of the programs will not be subject to the annual federal budget process. They will not appear in the budget, will not be reviewed by the budget or appropriations committees and will not be voted upon by any elected official..

Given the magnitude of the expected subsidies and the unique process by which they are to be funded, we believe the FCC’s decision is critical for taxpayers and consumers. Ideally, the plan should be sent back to the drawing board and replaced by one that reduces or eliminates, rather than increases, subsidies in the dynamic telecommunications market. Short of that, there are some specific steps the FCC can take to limit the potential harm caused by these new programs:

1. Make fees explicit to consumers. For any subsidy, there is a cost. That cost may be assessed in a multitude of ways, but ultimately it will be borne by the consumer. The question then is not whether consumers will pay, but will they be told what they are paying, or whether it will be hidden as an indirect tax. Given the Telecommunication Act’s requirement that all subsidies be “explicit,” any assessment should be made explicit to the ultimate consumer, preferably as a line item on his or her bill.

2. Give Congress an opportunity to review the decision. Never before has a subsidy program of this magnitude been adopted by an independent agency. The Commission should give Congress an opportunity to review the plan before it takes effect.

3. Limit subsidies for individuals to basic, essential services. Funding should go toward basic telecommunications access needs, rather than for non-basic services such as second lines.

4. Do not accumulate revenue in a trust fund. Under the current plan, telecommunications carriers, and, in turn, consumers and small business owners, will be obligated to pay $5 billion annually even if significantly less is needed to fund the programs. Excess collections would simply accumulate until used to pay for some new funding “requirement,” beyond that called for in the act.

5. Eliminate subsidies that crowd out ongoing private activity The plan reportedly will also include funding for “inside wiring” of schools, and perhaps even computers, although many providers already provide such services on a philanthropic basis, through “NetDay” and similar activities. This, and other provisions, would undermine these private activities. This would be particularly ironic, given President Clinton’s call only last week for increased volunteerism

6. Structure discounts as provided in the act, without direct grantmaking. The act asks the FCC to simply identify the telecommunications services for which a discount is to be provided to schools, libraries and health providers. The FCC, however, is considering a plan by which it would oversee the disbursal of funds based on direct grant requests - greatly increasing its ability to fund types of services not contemplated by Congress. This appears to be beyond the legal authority of the act.