The Economics of Universal Service Fund Reform

Two broad proposals have been advanced to modernize the Universal Service Fund's contributions system: 1) expanding the contribution base to include revenues from broadband internet access service, and 2) broadening the USF contribution base to include entities including edge providers such as streaming video providers, digital advertising firms, and cloud services companies. The most economically efficient option for reform is to expand the contribution base to include broadband internet access service revenues. Expanding the contribution base to include broadband internet access service revenues will simultaneously lower the effective USF fee (from today's 34.5% to 3.7%) and broaden the base from which the funding comes (all uses of broadband), reducing market distortions in line with economic principles and the institutional history of the USF. Under plausible assumptions for service plan prices, consumers will not face a significant price increase and many will likely achieve savings due to the decrease in contribution factor on voice service. In addition, to the extent any additional fees levied are passed onto downstream consumers, the burden will likely be borne relatively more by high-income consumers