Capitol Comment 185 – A Policy Two-Step that is a Political Winner

“Life is better here,” claims a new advertisement for a telecommunications company. The slogan conjures images of individuals free of hassles and ready to tackle the challenges of the 21st century with technology as an ally. Unfortunately, today’s laws and regulations stand in the way.

Life certainly would be better if American consumers could save more than $85.1 billion over the course of the next five years. Sound farfetched? Sadly, it would only require the introduction of a dose of common sense to federal telecommunications policy.

Between the authority of the Congress and the activism of the Federal Communications Commission (FCC), two actions would dramatically improve the shape of our national telecommunications policies. As a result, life would be better for American consumers as they look toward the next century. The same actions could also make it easier for politicians as they look toward the next election cycle.

Step One: Congress should pass legislation to eliminate the federal excise tax on telecommunications services.

Step Two: The FCC should repeal its universal service regulations and request detailed instructions from Congress on how to administer this costly and questionable entitlement.

Taken together, these changes would save American consumers nearly $4.1 billion in the second half of 1998 alone. Over the course of the next five years, the savings would be a staggering $85.1 billion or nearly $855 per household.

In addition to being sound policy, this two step approach has the added benefit of being a political winner. Congress could deliver a tax cut, and administration’s expert regulatory agency could declare that it will no longer attempt to implement costly regulations without explicit authority and direction from Congress.

First, consider the excise tax, a three-percent tax that consumers pay on all telecommunications services. This is a federal penalty on communication. One hundred years ago this tax was conceived as a luxury tax — to fund the Spanish-American War. In a time of peace, when communication services are ubiquitous, this type of “luxury tax” is an anachronism and should be eliminated.

Next, the FCC should admit the obvious and ask for help. Congress gave the FCC an impossible task and is now complaining that it has not been fulfilled. Under the guise of universal service, the Telecommunications Act of 1996, and its subsequent regulations, has exacerbated an intricate cross-subsidy regime that favors local customers over long-distance customers, rural customers over urban customers, and residential customers over business customers.

The primary goal of the Act was to decrease regulation and increase competition. Easy enough, Congress assumed that the former would lead to the latter. Congress, however, also rightly demanded that the elaborate telecommunications subsidy system become explicit to consumers. Finally, in conjunction with an overactive FCC, Congress dramatically expanded the pool of beneficiaries — notably through discounted Internet services to schools, libraries and rural healthcare providers.

Congressional leaders now maintain that they expected to realize all of these goals while consumer rates remained steady or even dropped. Impossible. The FCC could not possibly tax and then spend billions of dollars on telecommunications subsidies without forcing rates to increase on telecommunications services.

In its present form, the administration of universal service is in serious trouble. Recent congressional hearings have cast an unfavorable light on the FCC’s creation of a series of non-profit corporations to administer the universal service programs. Currently, litigation in the 5th U.S. Circuit Court of Appeals is trying to determine if anyone other than Congress can assess and collect taxes — specifically to pay for universal service. Furthermore, the General Accounting Office deemed that the FCC violated the law when it established these corporations.

If the FCC succeeds in all of its legal challenges, it will find itself responsible for a multi-billion dollar program that the president’s budget estimates will more than quadruple in the next five years. Dr. Jerry Hausman of M.I.T. has estimated that for every dollar raised to pay for Internet access by the Schools and Libraries Corporation, an additional $1.05 to $1.25 must be raised to administer the program. Universal service is costly and inefficient.

The fuse has already been lit for this political time bomb. Unlike the excise tax, the universal service shell game is almost entirely hidden from consumers. In July, the charges assessed by telephone companies to consumers will increase to keep pace with the collection schedule created by the FCC. And in November, members of Congress will have to answer to voters about those new charges being administered by the FCC.

As an alternative, the FCC should excuse itself from the messy business of administering tax and social welfare policies. Universal service subsidies, if they have any merit, should be debated publicly and passed by Congress. All the FCC should do is ask for direction and then wait until Congress provides a practical answer with specific guidelines.

Life is better when individuals are able to communicate freely. As a result, government has an obligation to keep itself out of the business of regulating and taxing communication. Unfortunately, a one hundred-year-old tax and the FCC stand in the way of real savings for American consumers.