Senators oppose plan to curb phone taxes

Limits on federal spending will "place rural America at a tremendous disadvantage," say pro-tax senators in rural states.
Written by Anne Broache, Contributor
WASHINGTON--There are few defenders of those rapidly multiplying taxes, fees and other surcharges that appear at the end of Americans' phone bills every month.

But in the U.S. Congress, senators from rural states that benefit from the mandatory levies on Tuesday attacked a proposal to cap those taxes.

At issue is whether those unpopular taxes, which flow into a pool of money called the Universal Service Fund, have spiraled out of control. Last month, a federal panel recommended some temporary caps on funding for wireless providers--which would effectively keep in place the 2006 level of $1 billion.

"When you're assessing surcharges that high, you ought to be delivering something that's measurable, that's tangible and that's going to those people who need it the most," said Sen. John Sununu, a New Hampshire Republican.

Around $1 billion might seem like a lot of money being diverted to wireless providers in what federal rules call high-cost areas (typically rural ones). But it may not be enough for senators such as Ted Stevens, an Alaska Republican, or Olympia Snowe, a Maine Republican, who expressed their steadfast opposition to limits during Tuesday's hearing.

Limits on federal spending will "place rural America at a tremendous disadvantage," Snowe said. States like Maine depend on subsidies for better mobile phone coverage, she said.

"When you're assessing surcharges that high, you ought to be delivering something that's measurable, that's tangible and that's going to those people who need it the most."
--Sen. John Sununu

The federal panel's proposal would rein in the Universal Service Fund, which overall doled out more than $7.3 billion last year alone to subsidize telephone service in rural and low-income areas and in schools and libraries. Since its inception during the Clinton administration, the fund has been plagued by waste, fraud and abuse.

Senators on Tuesday were vocal, however, about their frustrations with the panel's plan, which some dubbed a "piecemeal" approach that did nothing to address fundamental concerns with waste and fraud in the program. Some said they were concerned, for instance, that consumers would continue to see rising line-item charges on their phone bills, and with no guarantee that their money was going to areas that truly need help.

Right now, phone companies--including wireline, wireless and Internet phone providers--are subject to a federal tax of 11.7 percent of their long-distance call revenues, which they typically collect from their subscribers each month.

Federal Communications Commissioner Deborah Taylor Tate, who heads the joint board, endured repeated questioning from the politicians about why the FCC hadn't done more to stabilize the fund. She suggested it was difficult to reach a consensus but repeatedly said it was necessary "to move forward absolutely as quickly as possible toward fundamental reform."

Plagued by controversy, fraud and abuse
At issue in the board's recommendation is a portion of the controversy-plagued Universal Service Fund used to help fund wireless carriers building cell sites and other network infrastructure in rural areas. The amount doled out to those companies has grown from about $15 million in 2001 to about $1 billion in 2006--representing an annual rate of more than 100 percent--according to the board.

Without immediate changes, the entire fund is in danger of becoming unsustainable in the future, the board, which is also composed of other FCC commissioners and staff, state utility commissioners and consumer advocates, said in its recent report (PDF). That's why it suggested restricting those payments to their 2006 levels for the next 18 months.

But some senators suggested a cap was the wrong approach. Rather than going that route, some suggested the FCC should restructure the way it doles out the funds in the first place--and threatened to step in with new laws if the regulators didn't act.

"As I understand it, if Carrier A is serving and Carrier B comes in to compete...the reimbursement of Carrier B is based on costs of Carrier A, not Carrier B," said Sen. Stevens, the committee's vice chairman. "In almost every circumstance, Carrier B has substantially lower costs. Why the windfall?"

The joint board's recommendation does enjoy support from a number of phone companies, such as Verizon and AT&T, and industry groups representing companies that have traditionally provided wireline telephone service, such as the U.S. Telecom Association. They say a cap is fully justified because caps already exist for wireline carriers and because consumers shouldn't have to put up with increasing taxes on their bills.

"The funding today is not targeted toward underserved areas," Joel Lubin, an AT&T vice president, told the politicians. Instead, consumers are footing the bill for multiple wireless providers to build out services in the same neighborhoods, he added.

But smaller wireless carriers and public safety officials in rural states argue that limiting the amount of funding available to them would harm the well-being of consumers in the areas they hope to serve.

U.S. Cellular President John Rooney said his company, which provides service in 200 regional markets around the country, also opposed the cap proposal because it was "wildly unfair" to wireless companies that are committed to extending their service to rural areas.

"Today we are using that (USF) support to provide rural consumers with essential services in ways that would not otherwise be possible," he told the politicians.

CNET News.com's Declan McCullagh contributed to this report.

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