- The Washington Times - Monday, June 2, 2003

NEW YORK — The Universal Service tax seems minor considering all the extra charges on phone bills, like one last pair of socks squeezed into a bulging suitcase.

Its reach is big, however: It covers the high cost of making it possible for Americans to reach out and touch someone from mountains, swamps and other remote areas. It subsidizes phone bills for poor people and technology at schools and libraries.

Universal Service is also a big mess. Its main source of revenue, long-distance calls, isn’t what it used to be, thanks to e-mail and other technologies. Meanwhile, more hands are dipping into the pot than ever, leading to some assertions that the program is in a “death spiral.”

Rescue plans have been proposed, but consumer groups are worried. One plan submitted to the Federal Communications Commission would raise the average Universal Service charge, now $2.24 per month, to $3.47 in 2004 and $3.81 in 2007, according to an FCC study.

Even though other proposals would lead to smaller increases, consumer groups say all of them would unfairly lower what big phone users pay while jacking up fees for infrequent callers.

“It doesn’t get a lot of attention, but when the bill pops up, 100 million rate-paying households say, ‘Hey, where’d that $1 come from, where’d that $1.50 come from?” said Mark Cooper, research director at the Consumer Federation of America. “And the answer is, it came from a lot of shenanigans in Washington.”

Traditionally, phone companies were allowed to raise prices for connecting calls to cities to make up for losses they incurred stringing up and maintaining lines in remote areas.

The 1996 Telecommunications Act formalized the process by establishing the Universal Service tax, which is 9.1 percent of interstate and international phone revenue, levied as a sales tax on each phone bill.

Last year, the nonprofit Universal Service Administrative Co., which administers the fund, shelled out $5.4 billion, including $3 billion, or 56 percent, to 1,500 phone companies that offer service in costly areas. The rest subsidized service for poor people, rural health care providers and the “e-rate” technology program for schools and libraries.

“For customers in rural states that we serve, where the cost of their phone service would be $60 or $70 a month just to have the line, the high-cost fund keeps their phone affordable,” said John Jones, a policy vice president at CenturyTel Inc., which has lines in 22 states.

Yet the pool of revenue taxed for Universal Service is shrinking. Long-distance minutes and prices have fallen, while flat-rate packages of wireless and land-line service have blurred the billing distinction between local and long-distance.

The FCC tried to plug part of the hole in December by nearly doubling the maximum percentage that wireless carriers must contribute to Universal Service.

But other inequities remain. High-speed DSL Internet access is taxed for Universal Service, though cable-modem access is not.

Adding to the problem, wireless carriers are increasingly persuading state regulators to give them Universal Service grants for rural areas, even to serve customers who have subsidized land-line phone lines. Wireless carriers are reimbursed at the same rate as land-line providers, even if the wireless companies’ infrastructure costs are much lower.

Without changes, the tax on land-line phone revenue is expected to steadily rise, perhaps hitting 12 percent in three years.

The FCC is likely to tweak the eligibility rules for Universal Service funds next year. Other changes are possible in Congress.

For now, consumer groups are worried about proposals for the FCC to replace the Universal Service tax with flat fees customers would pay regardless of phone usage.

Each plan’s advocates say their system is the fairest and most predictable way of keeping Universal Service fully funded while accounting for new technologies such as Internet-based phone calls.

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