Overhauling the Universal Service Fund: Aligning Policy with Economic Reality

Two very real Universal Service Fund (USF) problems need to be addressed: funding and spending. The way the program is funded is inefficient, unsustainable, and regressive. Regardless of the judicial outcome, the tax that the court declared unconstitutional is both inefficient, by taxing a small, price-sensitive, declining base, and regressive, with a higher proportional burden falling on those least able to afford it. The program spends too much money on the wrong things. The High Cost Fund in particular, which accounts for about half of total spending, is outdated and wasteful. Research shows that it has not made much of a difference in connecting households despite billions of dollars spent every year for the past 25 years. Additionally, new terrestrial and satellite fixed wireless technologies challenge the fundamental idea of “high cost” areas since satellite in particular entails the same costs everywhere. The Universal Service Administrative Corporation (USAC)—the organization the Federal Communications Commission created to manage the USF—has increased its administrative expenses from $105 million in 2010 to $204 million in 2020 to $365 million in 2023 while program expenditures stayed fairly constant. Solutions to both of these problems are straightforward: 1) Expand the tax base. Funding the program from general government revenues, as Congress did with the Affordable Connectivity Program, is more efficient and less regressive than the current system. 2) Reduce the size of the fund substantially. Satellite and wireless providers are likely to be able serve higher cost areas with much lower, if any, subsidy.