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Town or Country?

Phone taxes meant to help rural areas may not be doing their job.

As one U.S. senator famously observed: "A billion here, a billion there, and pretty soon you're talking real money." Look at the annual take of the Universal Services Fund: It has quadrupled from $1.8 billion in 1996 to $7.2 billion today.

Created to bring phone lines to rural communities, USF also subsidizes phones in low-income homes and broadband in schools and libraries. Who pays? Check your VoIP bill. It probably carries a new surcharge of two bucks and some change, says Jim Kohlenberger, executive director of the Voice on the Net Coalition. With taxes on landline and cellular bills, USF taxes are about $72 annually. Not a huge sum, but just one of a dozen tax categories on some bills.

Who benefits? Poor kids studying in rural libraries? Maybe. But at least $4 billion of the $7.2 billion is earmarked for the same phone companies collecting those taxes. For example, FCC documents indicate that the $1 billion subsidy for wireless providers in 2006 could jump to $2.5 billion in 2009. A recent study by Criterion Economics found that subsidized carriers provide significantly less rural coverage than carriers receiving no subsidies. Another study sponsored by The Seniors Coalition identified 20 companies collecting between $1,000 and $13,000 annually for each subsidized rural line.

Still, Congress is resisting an FCC decision "to rein in the explosive growth in high-cost universal service support disbursements," and that bodes ill for the federal prohibition on internet taxes expiring in November. Many of the 30,000 state and local taxing authorities are poised to tax everything from broadband connections to e-commerce sales, says Kohlenberger, even if the internet ban gets extended. The strategy seems to be to levy first and let the courts sort it out.

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This article was originally published in the September 2007 print edition of Entrepreneur with the headline: Town or Country?.

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