Hal Singer and Robert Litan over at Progressive Policy Institute caused some stir recently with this paper claiming that if the Federal Communications Commission (FCC) reclassifies broadband as a Title II telecommunications service, it will tack on over $15 billion in new state taxes, fees and federal universal service charges. As Free Press already pointed out, (a) Congress extending the Internet Tax Freedom Act (ITFA) in the recent “CRomnibus” funding bill” takes the state tax issue off the table; and (b) even without ITFA, the PPI Report made a lot of questionable assumptions to reach their high number.
Update: Senator Ron Wyden (D-OR), one of the drafters of the IFTA extension, has this short but forceful statement about the claims that reclassifying broadband as Title II will allow states to tax broadband access despite IFTA. “Baloney.”
Happily, the ITFA extension lets us blow past the debate about whether states even use the FCC definition of “telecommunications” for revenue services (many don’t, see, e.g., this tax letter from Tennessee as an example). We can cut right to the chase on the big thing ITFA doesn’t cover — Universal Service Fund (USF). Here again, I want to blow past the question of the numbers used by PPI (which rely on a set of assumptions that amount to what we call in the trade a SWAG (“scientific wild ass guess”)) and focus on the debate we should be having — do we still believe in Universal Service or not?
If we no longer believe in Universal Service as a fundamental principle, fine. Lets own that and end the program. If we do believe in the principle of universal service, and we agree that broadband is the critical communications medium of the 21st Century, it makes no sense to play tax arbitrage games with definitions. The FCC continues to play silly, complicated games with the Connect America Fund (CAF) because everyone wants to redirect USF support to broadband but nobody wants to include broadband in the contribution base. As a result, an increasingly smaller base of voice services is supporting an increasingly larger set of overall services. This makes no sense and is inherently unsustainable.
As I explain below, this isn’t the first time we’ve debated the importance of universal service and whether we care enough about it to pay for it. Nor will reclassification trigger some sort of “sticker shock,” as the PPI paper suggests. Instead, as I explain below, reclassification is the prelude to the real debate we need to have on whether we still believe in the fundamental principle of service to all Americans, or not.
Those of us with memories that stretch back to the 1996 Act will recall that we had this debate before. Opponents attacked USF as a needless tax increase to fund useless and inefficient federal subsidies. The E-Rate Program to connect schools and libraries to the Internet came in for particular ridicule, with opponents calling it the “Gore Tax.” But we decided that we cared enough about the principle of universal service, and about giving our children access to the Internet for education, to actually buckle down and pay for it rather than simply give the principle lip service. And, despite the anti-tax fever raging in the 1990s, even a large number Republicans ultimately came to embrace USF as necessary.
A political generation later, we clearly need to have the same debate again. If we do not believe in universal service for broadband, the FCC can forbear from Section 254 (the provision governing USF). But if we do believe in USF support for broadband, then reclassifying broadband as a Title II service makes this enormously simpler and straightforward. The FCC has already said in its reclassification/forbearance proposal that it intends to stay operation of Section 254 pending resolution of its overall USF reform docket — so we have no worries about “sticker shock.” To the contrary, reclassification is the first step in the debate we need to have.
Why Do We Need To Reclassify To Include Broadband In USF?
Go back and read my history of USF and the Lifeline program over here. Back when AT&T and other local phone companies were regulated monopolies, we subsidized service to the poor by requiring telephone companies to offer a cheap, basic service; we subsidized build out to high cost rural areas (where the cost of build out exceeds the rate of return) by charging high rates for long distance and through a bunch of other hidden subsidies. When we broke up the Bell system and introduced competition into the long distance market, the FCC replaced this system of hidden subsidies with a direct fee take out of interstate telecommunications revenues. Why? Because the FCC had jurisdiction over interstate revenues and this went to the statutory command of ensuring universal service to all Americans. States took a fee out of local intrastate revenue for state universal service funds and also regulated local rates to ensure affordable service for the poor.
As part of the Telecommunications Act of 1996, Congress codified the FCC’s invention in Section 254 and Section 214(e) (they also added E-Rate and the Rural Telehealth Fund). In good Washington fashion, Congress did not expand the range of who would pay into the fund. Also in good Washington fashion, the telecommunications providers paying into the fund fought to make sure that their money didn’t go to anyone else. So the current USF statute limits the contribution base to telecommunications providers, limits the eligibility to receive High Cost subsidy to “Eligible Telecommunications Carriers,” and limits Lifeline subsidies for the poor to telecommunications services.
The FCC has spent the last four years or so trying to find creative ways to migrate USF from traditional voice service (which — as everyone knows — is being phased out along with the rest of the traditional phone system) to cover broadband. It has managed to some degree for High Cost Fund through the Connect America Fund and the Rural Broadband Experiments Program, but it hasn’t managed very well to extend Lifeline to cover broadband. Worse, while expanding the potential covered services, the FCC has done nothing to expand the base of contributors paying into the system. With less and less revenue coming from traditional telecommunications services, the contribution pool keeps shrinking. To keep USF from growing beyond what voice customers can pay, the FCC has capped the USF fund. Which means, unless the FCC raises the cap (as it did last week to expand E-Rate), we have more services and more providers asking for money, but a smaller pool of contributors into an increasingly inadequate fund.
If we care about USF, and really believe that Americans need access to broadband in the 21st Century the way they needed access to phone service in the 20th Century, then we need to reform the program. Reclassifying broadband as telecommunications rather than an information service allows us to do that.
I will pause here to note I do not think we should classify broadband as a Title II service to make it part of USF. I think we should make it a Title II service because it fits the definition of a Title II service (as I argued all the way back before the Brand X decision in 2005). Similarly, I do not think we should decide to keep broadband an information service so we can create a giant tax loophole and regulatory arbitrage for cable and telephone companies. (Although I suppose if the goal is to build the “Internet for the 1%” by allowing paid prioritization, we ought to replicate all the corporate welfare and tax loopholes the 1% enjoy in meatspace.) Rather, I think that one benefit of reclassifying broadband as Title II is that it will eliminate the current regulatory arbitrage and bring us back to the debate we ought to honestly have — whether we want to keep funding vital communication services for all Americans, or not.
Shouldn’t We Wait For Congress?
Congress will, ultimately, take this on just as they did in 1996. Indeed, some members, like Rep. Doris Matsui (D-CA), have introduced legislation to address USF and broadband. But Congress traditionally does not act in a vacuum. It builds on what the FCC has done. The FCC created the USF program in the 198os in response to a changing market under its ancillary authority. It took Congress more than 1o years to ratify this with legislation. Furthermore, as I noted above, the FCC used to collect USF contributions from broadband services when those broadband services were classed as “telecommunications services.” It is no more improper for the FCC to consider how to fit broadband into the fund today than it was improper for the FCC to remove broadband from the fund in 2005 when it reclassified DSL as an information service.
And, again, the point of reclassification is not to do USF reform. The point is to recognize broadband for what it is — the basic telecommunications service of the 21st Century. Which leads me to argue once again that PPI has it exactly backwards. We should not continue to wrongly classify broadband as a Title I information service so we can pay lip service (but only lip service) to the importance of universal broadband access without figuring out how to pay for it. We should openly embrace the debate and honestly determine whether we care enough about our fundamental principles to actually find a way to pay for them. Or not. But PPI’s effort to turn the prospect of an honest debate on USF for the 21st Century into a boogeyman to prevent reclassification in the first place is not merely wrong on the facts and wrong on the law. It is the ultimate act of moral cowardice, allowing us to pay lip service — but only lip service — to the importance of universal, affordable broadband while conveniently denying us the power to actually do anything about it.
What About Potential Sticker Shock?
As I mentioned above, PPI is both wrong on the facts and wrong on the law when they imply that reclassification would produce mammoth sticker shock. I have consistently said here we need to have an honest debate about the future of USF, which can only take place if we reclassify broadband as a Title II service. Reclassification would simply open that debate.
PPI attempts to estimate a USF charge to broadband by making some rather simplistic assumptions. This ignores several important points. First, the FCC has explicitly proposed to temporarily stay the operation of the USF rules until it has conducted a proceeding to determine whether and how to include broadband services in the contribution pool, what (if any) broadband services it would cover, and how to divide the revenue between interstate and intrastate (PPI assume all revenue is interstate and thus subject to USF, one of many simplifying assumptions that raises significant doubt about their estimate).
Note, I’m not talking about forbearance (still easy-peasy, as demonstrated by the FCC doing forbearance as part of last week’s USF reform order), I’m talking about a standard stay pending development of actual rules to implement the statutory obligation. The FCC did the same thing in reverse in 2005 when it reclassified DSL as an information service, requiring a year phase out of the USF contribution to prevent a sudden, massive change in the fund.
A USF rulemaking following reclassification is precisely the debate we should have — and one we cannot have without reclassification. We’ve tried for more than four years to have the USF reform debate without actually including broadband as a covered service, and it simply doesn’t work. No matter what the FCC tries to do under the existing classification, it runs into the same problem. How do you stretch the statute to provide money to non-telecommunications services, and how do you actually pay for it given that contribution is limited to a shrinking pool of telecommunication services?
With broadband properly reclassified as Title II, the FCC can rationally rethink how to reform the fund for the 21st Century while balancing the need to avoid driving up the cost of broadband generally. For example, the FCC can chose to cap the fund (as it does now for voice) and cap maximum contributions if a straight up assessment would impose too high a cost on broadband services. Or, if we ultimately decide we don’t care enough about universal service to actually pay for it, the FCC can forbear entirely from applying USF to broadband.
Whatever our ultimate decision on USF and broadband, we will take some time to sort it out. In the interim, we will have no sticker shock. To the extent PPI argues that the FCC is required by law to impose a USF assessment on broadband the day after it reclassifies, it is simply wrong. To the extent PPI proposes to project the ultimate answer to how the FCC would assess USF fees for broadband services, it is merely guessing. The range could extend from “zero” (if the FCC ultimately decides to forbear) to something far less than PPI’s projection (see Free Press’ analysis here for a more modest guess).
Instead of guessing and playing games with definitions to create loopholes and encourage regulatory arbitrage, we ought to have an honest, real debate on the future of USF. Both Republican Commissioners have stressed their concern for rural America and the importance of ubiquitous, affordable broadband. So what’s their plan? Does PPI want us to forget about universal service entirely? Do we tell rural America and the urban poor “sorry guys, sucks to be you. We’d love to get you the affordable broadband service you need to educate your children and find jobs and stuff, we just don’t want to actually pay for it.”
We’ve tried voluntary programs like Connect To Compete. They don’t solve the problem because companies are not in the business of solving our public policy problems with charity. Nor can we require providers to serve everyone under existing law. In addition to the question of economic sustainability, a requirement for broadband providers to serve everyone would violate the common carrier prohibition — unless we reclassified broadband as an actual common carrier under Title II.
Solving the Universal Service problem shouldn’t drive Title II. But I refuse to run away from Title II because reclassification forces us to debate the future of the Universal Service Fund and the fundamental value of universal service. In 1996, a handful of conservatives tried to scare us away from our fundamental commitment to all Americans by labelling USF “the Gore Tax.” We should not allow a handful of carriers and their supporters from scaring us away from even having the debate about universal service in the 21st Century using similar tactics.
Stay tuned . . .