NCPA - National Center for Policy Analysis

Reforming Low-Income Phone Subsidies

November 7, 2013

The Federal Communications Commission (FCC) subsidizes phone service for low-income households, funded by the universal service charge assessed on all consumers' phone bills. The cost of this program ballooned from $819 million in 2008 to $2.19 billion in 2012, says Jerry Ellig, a senior research fellow at the Mercatus Center at George Mason University.

  • Historically, the FCC's Universal Service Fund has paid for two programs that subsidize telephone service for low-income households.
  • Lifeline, the larger program, pays phone companies to reduce monthly subscription fees for low-income households by an average of $9.25 per month.
  • Link Up subsidizes one-time connection charges by up to $30. In 2012, the FCC voted to phase out Link Up.

General federal tax revenues do not fund these subsidies. Instead, the FCC assesses a "contribution factor" on phone companies' interstate and international revenues. Though not called a tax, the contribution factor acts like a percentage tax on wired and wireless phone companies' revenues.

Prior to 2013, some households received more than one subsidized telephone line, signed up for Lifeline even though they were not eligible, or remained in Lifeline even though they were no longer eligible.

  • FCC audits revealed 1.5 million duplicate subscriptions costing $180 million annually.
  • Carriers sometimes received subsidy payments for subscribers who did not actually use the service.
  • In 2012, the FCC terminated $30 million worth of subsidies for more than 275,000 Lifeline subscribers who were not using their phones.

Wireless carriers specializing in Lifeline service have dramatically reduced the cost of providing basic phone service. This means it should be possible to serve the same number of subscribers at lower cost, or a larger number of subscribers at the same cost.

Controlling costs while continuing to serve low-income households will likely require some combination of a reduction in the per-line subsidy, a program participation fee for all households and a cap on the program's budget.

Source: Jerry Ellig, "Reforming the FCC's Low-Income Phone Subsidies," Mercatus Center, October 2013.


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