August 23, 2013
The path to reforming and modernizing the E-Rate program should not include unnecessary hikes in fees that are paid for by low- and middle-income Americans who are already overtaxed and struggling in this sluggish economy.
The White House stirred up this controversy last week by endorsing additional fees to cell phone bills to pay for their ConnectED proposal. This was unfortunate. Rather than discussing the best way to simplify and reform this important program, the conversation quickly turned into a heated debate over how an expansion should be funded. This is the wrong conversation to have. Republicans and Democrats both understand that the E-Rate in its current form is outdated, complicated, and prone to serious waste. First, we need to streamline and reform the program to make it work better for schools and libraries.
The White House and its supporters have suggested that expanding the E-Rate program could be financed with an additional $5 a year increase in Universal Service Fund (USF) fees. In Washington D.C., that may not sound like a lot of money, but outside the Beltway, this fee unduly hurts low-income individuals and piles on to an exorbitantly high series of existing telecommunications taxes and fees.
Looking at wireless bills across America, a study by the independent, non-partisan Tax Foundation found that wireless consumers pay an average 17.18 percent in taxes and fees on their cell phone bill, with some as high as 24.49 percent in states such as Nebraska.
Generally, tax systems strive to produce revenue to finance government programs in a way that does the least harm to the economy and treats taxpayers fairly. Sin taxes are used to increase the costs of activities that we want to discourage in order to raise revenue for investments we think will lead to a positive change. This is why the Administration desires to use a tobacco tax to pay for early childhood education, instead of taxing something we want to encourage, like buying vegetables for example. It seems counterintuitive, but wireless is often taxed at a much higher level than these “sin” products, when we want to actually encourage more families to adopt wireless and broadband.
This is the backdrop which any proposed E-Rate increase plays against. The four USF programs are funded through a percentage of interstate end-user revenue (called the contribution rate), which include long distance, local telephone, wireless and paging services. Nearly three-quarters of USF contributions come from just five companies: AT&T, CenturyLink, Sprint Nextel, T-Mobile and Verizon.
While the courts have technically declared the fee to not be a tax, it has the same effect as a tax in terms of the burden imposed on a group of consumers. With increased demands on USF programs and an unstable and declining source of funds, the Federal Communications Commission (FCC) has had to more than double the rate from 5.7 percent in 2002 to as high as 17 percent in 2012. These increases are passed along to consumer phone bills.
It is no wonder the FCC declared in 2012, that “The current contribution system has given rise to uncertainty, inefficiency, and market distortions. Outdated rules and loopholes mean that services that compete directly against each other may face different treatment.” They issued an a Notice of Proposed Rulemaking (NPRM) asking for ideas on how to reform it, but while the problems are easy to identify, the solutions have proven to be elusive and no changes have been made as of yet.
Reforming the contribution mechanism requires difficult political tradeoffs and carefully balancing competing interests. Extending the funding base to include other services might diminish broadband adoption by increasing the price of broadband services. Raising the contribution rate raises the costs for some services and creates inequity among providers who are forced to pay into a fund which then subsidizes their competitors.
The deeper problem with all of these fees and taxes is that they are regressive. They impose a greater burden relative to income on the poor than on the rich. And more recent research suggests that lower-income individuals are more price sensitive with telecommunications costs than higher-income individuals, which means they are more likely to cancel their service should their monthly bills rise.
There are other options besides raising the contribution rate or broadening the funding base. Senator McCaskill has suggested reallocating $2 billion in the Lifeline program for E-Rate given the high incidence of fraud, waste and abuse within the program. Commissioner Pai has proposed (with the support of a number of conservative groups) what amounts to a “PayGo” policy that would reallocate funds from other programs as the E-Rate cap is lifted. This is a perfectly reasonable proposal to adopt to provide the FCC time to fix the broken contribution system.
This is the type of creative and thoughtful thinking that must take place to ensure that meaningful E-Rate modernization and reform can move past the NPRM stage and become a reality. There is a rare bipartisan chance to eliminate waste, simplify the application process for schools, and ensure that the classrooms of the 21st century can receive the support they need and deserve. Don’t waste it.