At the end of June, the Universal Service Fund survived a Constitutional challenge. The United States Supreme Court voted six to three to uphold the Constitutionality of the USF with Chief Justice Fred Roberts, Amy Coney Barrett, Brett Kavanaugh, Elana Kagan, Sonia Sotomayor, and Ketanji Brown Jackson in the majority.
Few argue against the utility of the USF. As Jena Miller, executive director of Spruce Knob Seneca Rocks Telecommunications, a Pendleton County-based cooperative, stated “every telecommunications provider that participates in programs such as Lifeline, E-Rate, High Cost, or rural health programs would have been affected” by the Supreme Court ruling against the USF.
She added that “by the ruling being in favor of continuing USF, SKSRT is in a safer position to continue to participate in these programs and can be confident in long-term compliance.”
Miller may have understated the damage that could have occurred to other providers who rely on the fund had the USF been ruled against. “You’ve got recipients who made clear to us that if this were to happen, you’re talking about immediate bankruptcy and firing of companies and cutting back on service to many parts of America,” former FCC Commissioner Michael O’Rielly told the online trade publication Broadband Breakfast. “That’s not a good outcome.”
O’Reilly also has called himself a “frequent critic” of the USF as currently configured.
The USF originated as a strictly defined program with a strictly designed source of revenue. “Universal service” referred to landline telephones. The program originated during the Great Depression as a method of connecting customers in remote areas. For each customer connected to a landline the company – or in the case of SKSRT or Hardy Telecommunications, the non profit cooperative – received funds from the federal government. Funds came from fees charged to customers nationwide.
By the internet age, these companies could reinvest those funds into expanding fiber optic high speed internet service.
In 1996, the United States Congress passed a Telecommunications Act that removed the boundaries. Universal service started to encompass a broader spectrum of services while the law stated that telephone fees could be set at levels “sufficient” to pay for universal service.
It also allowed the erection of a corporate structure called the Universal Service Administrative Corporation to collect, manage, and disburse the USF. Costs of this have skyrocketed in recent years. The Technology Policy Institute states that the “Universal Service Administrative Corporation (USAC) – the organization the FCC created to manage the USF – has increased its administrative expenses from $105 million in 2010 to $204 million in 2020 to $365 million in 2023 while program expenditures stayed fairly constant.”
The entire 2023 budget of the Federal Communications Commission lies at only $25 million more than the cost of operating USAC.
The majority ruled that “sufficient” met the Constitutional requirements set on how the government can charge this fee, which the suit sought to have defined as a tax.
Justice Neil Gorsuch penned one of the dissents. While not disparaging the fund or the need for it, Gorsuch started his dissent by asking why ” the Administrative Company, dominated as it is by industry insiders, has allowed universal-service contributions to grow so dramatically. FCC regulations supply at least a partial explanation: “Federal universal service contribution costs may be recovered . . . through a line item on a customer’s bill.” 47 CFR §54.712(a). So, in the end, it is consumers who pay for the agency’s universal-service programs.”
Later in the dissent, Gorsuch argued that the fee did, in fact serve as a tax by another name, referring to the fact that former FCC commissioners have referred to it thus. Once one sees the fee as a tax, the rest of the legal justification for the structure crumbles.
Additionally, Gorsuch states “this Court has never approved legislation allowing an executive agency to tax domestically unless Congress itself has prescribed the tax rate.” The issue has come up as the changing market of communications technology and consumer consumption of it has shrank the base of revenues from which the USF draws. In response, it has considerably expanded the size of the fee while having to charge it to fewer people.
The Technology Policy Institute added that regardless of the question of Constitutionality, “the current mechanism for funding the USF is fundamentally flawed by any measure of the right way to tax.” It states that usually, government makes “the cost of a tax as small as possible” by targeting less price-sentitive areas while broadening the base to spread the impact.
USF, conversely, “taxes a narrow base of price-sensitive behavior” and also falls most heavily on those least able to pay.
While telecommunications companies felt relief in the wake of the decision, Gorsuch warned that it would be ripe for overturn and the Supreme Court has, in its history, overturned some decisions after only a handful of years. The recommendation from entities such as the Technology Policy Institute is for Congress to eliminate the USF’s revenue and distribution structure altogether and operate it like any other federal program.
They said “the best solution . . . is to fund USF out of general tax revenues. That would require annual Congressional appropriations. Congressional appropriations would have two benefits. First, the tax burden would be shared over a large base, meaning it would be relatively small and minimally distortionary. Second, it would create pressure to keep the size of the fund low and therefore for its programs to operate efficiently.”
