Conservative Group Challenges $8 Billion Phone Subsidy for Low-Income Households

A decades-old subsidy that helps poor people and rural areas pay for telecom services is at risk in a legal battle that could heat up in 2023. If the program needs to be rebuilt after the litigation, tech companies could be saddled with new fees.

The Universal Service Fund, which helps more than 8 million people afford phone and internet service, is facing legal challenges from the conservative advocacy group Consumers’ Research. The group has filed lawsuits in three US courts arguing that the program is unconstitutional because its funding is set by regulators, rather than by Congress.

There's a good chance one of the courts will strike down the program in 2023, shifting the battle to the US Supreme Court. There, justices who are skeptical of US regulatory agencies are likely to hand the challengers a win, according to Matthew Schettenhelm, a Bloomberg Industry analyst.

If the program is declared unconstitutional, that could prompt Congress to take action, according to Schettenhelm. This would increase the risk for big-tech platforms, as one of the most prominent proposals is to make them pay into the program for the first time.

The Federal Communications Commission oversees the Universal Service Fund. This program collects fees from consumers for telephone calls and uses this money to help people who cannot afford to pay for service, both wireless and fixed lines. The fund is also used to build telecommunications networks in hard-to-reach areas, and to connect libraries and rural health care clinics.

There is increasing discussion in Washington about using technology to fund the subsidy program, as the current funding mechanism is struggling. The fees for the program are assessed against traditional voice calls, which are declining in use. To maintain revenue, rates have increased, and are now at nearly 33% of assessed services, compared to 16% a decade ago. There are predictions that rates will continue to increase.

Telecom providers, such as AT&T Inc. and Verizon Communications Inc., collect the fees and funnel them back to the program. They also receive payments from the fund. These companies are eager to avoid a future of ever-increasing rates, as traditional phone service wanes.

"Broadband connectivity provides a lot of benefits for businesses, and we think that the contributions base should be expanded to include those companies that benefit the most from it," Nirali Patel, senior vice president at USTelecom, said in an emailed statement. USTelecom is a trade group whose members include AT&T and Verizon.

Patel said that the fund should be supported by "dominant edge providers that drive the vast majority of Internet traffic."

The tech companies being eyed for contributions to the proposed internet tax oppose the idea, said Carl Szabo, general counsel of NetChoice, a trade group with members including Amazon.com Inc., Alphabet Inc.’s Google, and Facebook-owner Meta Platforms Inc.

Szabo said in an email that at a time of heightened inflation and a failing economy, the last thing government should be doing is increasing taxes on Americans and American businesses. He added that the FCC should look to its existing funding and identify rampant waste rather than seek to tax American businesses.

At a Dec. 21 news conference, FCC Chairwoman Jessica Rosenworcel called the fund “an important tool for ensuring communications for everyone everywhere.” She said the court challenges will be “an important part” of discussions about the fund’s future.

Rosenworcel said that the FCC will be taking into account the court challenges as they consider the future of the fund. She reiterated that the fund is an important tool for ensuring communications access for all.

The FCC has suggested that one way to bolster the fund would be to charge fees against broadband providers such as Comcast Corp. and Charter Communications Inc. Another possibility would be to tap into tech resources. The agency did not recommend a specific course of action in its August report.

According to Blair Levin of New Street Research, it is unclear what Congress or the FCC will do if a court rules that the current system of universal service payments is illegal. He has predicted that there would be "political chaos and pain" if such a ruling were to occur.

Consumers’ Research was founded in 1929 as a product testing lab. In the 1950s, the organization shifted its focus to advocacy, filing lawsuits in the 5th, 6th and 11th circuits. The 5th circuit heard arguments in December 2020 and is expected to issue a ruling in the first half of 2023, according to Schettenhelm, the analyst.

In the litigation, Consumers’ Research argued that Congress unconstitutionally handed the power to raise fees to the FCC.

Will Hild, executive director of Consumers' Research, said in an interview that the kind of unbridled taxing power the founders were concerned about.

A representative for the Universal Service Fund declined to comment when reached for comment. The FCC, in a court filing, defended the program against what it called "baseless" claims.

In a court filing, members of Congress from both the Republican and Democratic parties defended the program, arguing that claims that the FCC lacks direction from Congress are historically inaccurate and simply incorrect.

"Our constituents rely on affordable internet services funded by the USF," said the legislators. "Senator John Thune, a Republican from South Dakota, and Senator Amy Klobuchar, a Minnesota Democrat, are committed to ensuring that these services remain affordable."

Hild, a former staffer for the conservative Federalist Society, said that taxation is the job of Congress, not regulators.

"Consumers need someone to hold accountable," he said.