Market-based Reforms Needed to Correct Failures of Universal Service Subsidies, Congress Urged to Act

A new report from the Competitive Enterprise Institute (CEI) highlights the pervasive failures of the Universal Service Fund (USF) subsidies and calls on Congress to dismantle the current system, advocating for a market-centered telecommunications policy. This timely report, Universal Service Subsidies Have Failed: Why it’s time for Congress to act, comes as the Supreme Court is expected to issue a ruling this summer in FCC v. Consumers’ Research, a case that has brought the constitutional infirmities of universal service subsidies to the forefront.

Authored by Solveig Singleton, an attorney and policy analyst, the report argues that regardless of the Supreme Court’s decision, the Fifth Circuit’s ruling in Consumers’ Research v. FCC in July 2024 has put policymakers on notice regarding serious problems with Section 254 of the Telecommunications Act of 1996. The Fifth Circuit found that the open-ended language of Section 254, combined with the FCC’s sub-delegation of power to a private corporation, the Universal Service Administrative Company (USAC), made USAC’s contribution charges an unconstitutional tax.

“The current universal service subsidy regime is inherently flawed, creating inequities and distorting markets,” said Singleton, author of the CEI report. “It’s time for Congress to move beyond incremental reforms and instead adopt a market-centered communications policy that benefits taxpayers and consumers alike, while restoring efficiency and accountability.”

The CEI paper details key problems with the existing universal service subsidy system, including:

• Market Distortions: Both the collection and distribution of USF subsidies distort markets. Consumers are discouraged from using services that are priced artificially high due to USF taxes, and subsidies distort carriers’ incentives, affecting decisions on market entry, investment, and competition. The report notes that universal service programs tend to favor wireline over wireless technologies, violating the principle of technological neutrality.
• Lack of Accountability: Universal service programs lack robust accountability measures, with questionable spending decisions that often bypass the appropriations process. This has led to billions of dollars in waste and fraud.

Singleton argues that incremental reforms, such as funding subsidies from electromagnetic spectrum auction revenues or from “edge providers” like streaming services, will not address the fundamental problems of unfairness, market distortion, and waste. Instead, the report advocates for eliminating the universal service subsidy regime established by Section 254.

A better alternative is a market-based regime that ensures access to advanced services at reasonable costs through principles like technological neutrality and built-in accountability. The report suggests that subsidies, if necessary, should be targeted only to low-income users through voucher programs funded by general tax revenues, and subject to strong means-testing and accountability.

View the report, Universal Service Subsidies Have Failed: Why it’s time for Congress to act, by Solveig Singleton.