NCPA - National Center for Policy Analysis

Universal Service Fees Are Uneconomic And Unfair

June 4, 1999

The universal service program is a federally mandated effort to ensure that people in all parts of the country have access to "reasonably priced" phone service. The program is funded through "federal line charges" or "access fees" paid by telephone subscribers to their local and long distance carriers.

Customers in low cost service areas -- the highly populated Northeast and most cities -- pay more into the universal program than they receive back in reduced basic phone charges, while customers in high cost service areas (mainly rural) pay rates that don't cover costs.

  • Approximately $24 billion annually is collected and redistributed in the federal and state systems -- about $17 billion are collected under state regulations and $7 billion under federally-mandated line charges.
  • Who benefits from the program depends on geographical location, rather than income -- thus a widow in New York City scraping by on Social Security pays a federal line fee of about $8 per month to subsidize below-cost phone service to ski chalets in rural Aspen and Vail, Colo.
  • The growth potential of line access charges and subsidies is unlimited, since the Telecommunications Act of 1996 provides an open-ended entitlement to "affordable" services for new broad-band services.
  • In addition, the act made schools, libraries and some health care providers eligible for subsidized hook-ups to the Internet, raising fees by an additional $21 billion over 20 years, according to Congressional Budget Office estimates.

Economists say cross-subsidies in the program discourage competition and prevent new technology from effectively emerging. For instance subsidized landline rates keep wireless providers from attracting rural consumers to their lower cost technology.

Bills in both houses of Congress were introduced last session to eliminate the additional Internet hook-up subsidies from the universal fund.

Source: Stephen J. Entin, "Taxing Talk: The Telephone Excise Tax and Universal Service Fees," IRET Policy Bulletin No.74, February 2, 1999, Institute for Research on the Economics of Taxation, 1300 19th Street, N.W., Suite 240, Washington, D.C. 20036, (202) 463-1400.


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