This 26-year-old federal fund evolved to fight the ‘digital divide.’ Now a court might throw it out.

This 26-year-old federal fund evolved to fight the ‘digital divide.’ Now a court might throw it out.

Over the past 26 years, the Universal Service Fund — a federal subsidy pool collected monthly from American telephone customers — has spent close to $9 billion a year to give Americans better phone and internet connections, wiring rural communities in Arkansas, inner-city neighborhoods in Chicago, and public libraries and schools across the country.

Now it faces the biggest crisis of its existence, and Congress appears paralyzed in the effort to fix it.

The fund, paid for with a surcharge on phone bills, could be America’s most important tool going forward to fix the so-called digital divide, the huge split in opportunity between Americans who have fast internet access and those who don’t. Such access is a bipartisan issue, benefiting both red-state rural communities and blue-leaning urban neighborhoods.

But despite support from both influential Republican and Democratic politicians, the fund now faces significant court challenges, thanks to lawsuits by conservative activists who claim it’s an unconstitutional tax. Many observers think at least one of the cases has a chance of convincing some judges to kill the fund.

Congress, which created the USF as part of its last landmark telecom law rewrite in 1996, could stop any potential shutdown by fast-tracking legislation securing the fund’s role and its constitutionality, funding sources and missions. But the roadblocks to any kind of deal on Capitol Hill are already looming. It has become the center of a Washington lobbying war between Big Tech and the leading telecom firms, both of which want the other to foot the bill. And partisan politics are seeping in, too, with some Republicans starting to attack the fund as an icon of government waste.

“This Congress, it’s not clear to me they could legislate anything — I haven’t seen it,” said Blair Levin, a veteran FCC official who served in senior agency posts across multiple Democratic administrations, and has been watching the issue as a market analyst for the firm New Street Research.

Some lawmakers, at least, insist it’s top of mind. “All attacks on the Universal Service Fund concern me,” said Sen. Ben Ray Luján (D-N.M.), who chairs the Senate Commerce Subcommittee on Communications, Media, and Broadband, and has started a Senate working group to save the fund. “I can’t imagine there are groups out there that want to strike down a program that is providing support to make connectivity more affordable.”

There are. In 2021 and 2022, a nonprofit called Consumers’ Research, founded in 1929 to champion conservative causes against the administrative state (and, in recent years, the concept of “wokeness” in corporations), filed largely identical lawsuits in multiple federal courts alongside a handful of other activists and an Ohio-based telecom company. The suits target the unusual way the fund is run. Since its inception in the 1990s, the USF money has been administered by a nonprofit entity called the Universal Service Administrative Company, which reports to the FCC but operates separately from the agency.

The Consumers’ Research suit argues that USF fees are actually taxes — and that the fund’s 1996 setup was unconstitutional because it wrongly gives the agency power to levy taxes, then allows it to delegate management to an outside entity.

Sen. Ben Ray Luján chairs the Senate Commerce Subcommittee on Communications, Media, and Broadband and has started a Senate working group to save the fund.

Initially, it looked like the suits were destined to fail. The FCC, which argues that it’s operating the fund as Congress intended, scored preliminary victories in recent months, when three-judge panels of the 5th and 6th U.S. Circuit Courts of Appeals shot down the arguments from Consumers’ Research in rulings that sided with the commission’s lawyers.

But in late June, the conservative-leaning 5th Circuit agreed to rehear the case before the full court, with new arguments set for Sept. 19 — which could put the fund back in legal peril. The 5th Circuit, based in New Orleans, is a conservative-leaning court that last year dealt a blow to the Consumer Financial Protection Bureau in a similarly argued case, saying that the agency’s funding mechanism is unconstitutional. An appeal in that case is pending before the U.S. Supreme Court.

Other similar cases filed by Consumers’ Research are pending before the 11th Circuit, which held oral arguments in June, and before the D.C. Circuit, which has not yet heard arguments.

The cases could ultimately end up at the U.S. Supreme Court, especially if the lower courts come to different conclusions.

Even the Universal Service Fund’s supporters acknowledge that it is due for an overhaul. It was set up in a time when “service” meant landlines, and the phone companies were the entire backbone of America’s communications infrastructure.

The fund was established as part of the landmark 1996 Telecommunications Act, and originally, its benefits were limited to phone lines. Carriers like BellSouth and MCI paid quarterly fees into the fund, which were then used to expand phone services throughout the nation.

As the internet has grown in importance, and telecom companies started prioritizing broadband service over their traditional phone lines, the fund’s mission evolved. FCC leaders decided to make broadband connectivity a central part of its work.

Then-AT&T Chairman Robert Allen testifies before the House Commerce Committee during a hearing on the Telecommunications Act — which would later establish the Universal Service Fund — on May 10, 1995.

This planted the seeds for the first big conflict over the fund. Traditional telecom companies are still on the hook for supplying the USF’s funding, but they argue the benefits of broadband largely go elsewhere — specifically to tech behemoths like Google, Meta and Netflix that depend heavily on broadband for their billions of dollars in profits, but which don’t contribute to the fund.

That has led to a bitter argument in Washington over who should pay going forward. Telecom companies, one of Washington’s most powerful lobbies, say it’s unfair for them to subsidize Amazon and Google. The tech giants, for their part — whose lobbying clout rivals the telecom industry — say they already pay plenty for infrastructure like content delivery networks and data centers. In Washington, their lobbyists describe the idea of contributing as a “tax on the internet.”

This argument has now been running for nearly 20 years, with no sign of resolution. Internet startups would like to “use my pipes free, but I ain’t going to let them do that, because we have spent this capital and we have to have a return on it,” telecom executive Ed Whitacre, who led AT&T for years, told a reporter in 2005. “So there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using.”

Politicians have another consideration: Their constituents with phone services, who end up paying for the fund. The telecom industry passes the fee directly to customers as a line item on their monthly landline or cellphone bill, so Americans with voice phone service end up paying usually at least a couple of dollars per month to support the programs.

That now puts Congress in the middle of a thorny and active debate over whether to shift the funding burden to providers of tech or broadband internet services — and likely new swathes of consumers — or directly appropriate taxpayer money.

“Nobody’s going to say, ‘Here’s a check, let me write it,’” Mignon Clyburn, a former Democratic FCC leader who helped expand the fund’s goals to broadband, told POLITICO. “There’s a lot of arm wrestling when it comes to how far those tentacles could reach.”

In the Senate, Luján, who has spent years in both chambers of the Capitol leading efforts to ensure broadband reaches remote communities in his rural home state, recently formed a bipartisan working group devoted to the fund’s future.

The Senate group holds discussions around potentially reshaping the fund and finding legislative consensus, according to the senators involved. Luján has voiced concerns about the fund’s long-term financial stability, as well as alarm about the legal challenges facing it.

He and nine other lawmakers from both parties submitted a court brief last year defending the fund’s current setup and warned of “catastrophic effects” for their constituents if it were thrown out.

No lawmaker, however, has proposed specifics for any greater reimagining of the quarter-century-old system, or outlined potential rescue plans if the fund falters.

Any legislative fix will also depend on the House, where the USF faces skepticism. The fund falls under the jurisdiction of the House Energy and Commerce Committee, whose Republican leaders told POLITICO last fall they are wary of taxpayer money going to waste.

They don’t want the USF to duplicate other federal efforts, and pledged to take stock of how much aid is really necessary, pointing out that Congress recently appropriated $65 billion in broadband aid in the 2021 infrastructure law, on top of billions of dollars flowing to broadband in pandemic relief packages.

High-voltage transmission lines provide electricity to data centers in Ashburn in Loudon County, Va, on July 16, 2023. The centers house the computer servers and hardware required to support modern internet use, including artificial intelligence.

In the Senate, where the fund falls under the jurisdiction of the Commerce Committee, Sen. Ted Cruz (R-Texas) has used his perch this year as the committee’s top Republican to publicly attack the fund as a “regressive, hidden tax on consumers used to fund a series of constantly expanding spending programs.” Like the plaintiffs in the court cases, Cruz has questioned the FCC’s delegation of USF operations, saying the nonprofit structure is opaque and has “shielded the FCC from accountability” when it comes to raising fees.

Although some top Republican lawmakers, including Sen. John Thune (R-S.D.), have defended the fund’s mission in court briefs, the USF presents an easy target for a party laser-focused on pointing the finger at government waste. A decade ago, conservatives attacked a USF affordability program known as Lifeline, meant to help low-income households, as a giveaway program of so-called “Obamaphones.” Although that label was rooted in false rumors of the Obama administration handing out free cellphones, government watchdogs have found various signs of misuse in that program over the years that led to various accountability protocols.

Another political fight is likely to come from the effort to find new sources of revenue. Though many observers agree that a new funding scheme is long overdue, neither the telecoms nor Big Tech giants are willing to budge on where that might come from.

Many telecom industry representatives believe tech giants should start contributing to the fund in some fashion, perhaps in the form of taxes on digital advertising, online streaming services or app store purchases — an idea that Republican FCC Commissioner Brendan Carr started loudly beating the drum for in 2021, fueling some lawmakers’ interest. It’s unclear how tech giants might try to pass the costs onto their consumers, although they would likely try to recoup expenses somehow, as the telecom industry does.

That would likely require Congress to change the underlying law. Many Republicans have signaled openness to exploring these revenue streams. House Speaker Kevin McCarthy (R-Calif.) dubbed the broader prospect “thought-provoking” in 2021.

Critics contend that the telecom giants — already charging millions of Americans for internet access every month — want to unduly offload their network costs to the tech industry while reaping the benefits of broadband subsidies and regulatory favors.

A worker installs broadband internet service to homes in a rural area near Belfair, Wash. Congress recently appropriated $65 billion in broadband aid in the 2021 infrastructure law.

Still, the idea of charging tech companies to help fund broadband expansion has been gaining steam in other parts of the globe, such as in Europe and South Korea. Thierry Breton, the European Union’s internal market commissioner and a former telecom executive, recently held a 12-week consultation looking at whether digital companies need to make a “fair contribution” to maintaining physical internet connectivity.

The Biden administration, however, warned Europe of the “substantial risks” of levying such payments from internet content and application providers. This position, which seemed to align with Silicon Valley’s priorities, wasn’t lost on the telecom lobby. In a statement to POLITICO responding to the administration comments, USTelecom CEO Jonathan Spalter said there’s “no doubt that the handful of dominant internet platforms that benefit the most from ubiquitous networks should pay into the Universal Service Fund.”

Another possibility could be the FCC expanding the types of services that must contribute to the fund — namely broadband providers, which proponents (including some tech representatives) think would be fairer than the current system. In that situation, ISPs would likely pass the fees onto their customers’ monthly internet bills, which if not paired with a broader overhaul, ISPs like AT&T fear would be a costly mistake raising internet prices for consumers across the board.

Some supporters say the FCC could make this change unilaterally, though with the fund under fire, Chair Jessica Rosenworcel wants to wait for a court decision before making any big changes to the system. And a report she released last year said taxing ISPs could undercut the administration’s broadband affordability goals by making consumers’ internet bills pricier.

The final possibility is having Congress earmark more money in each year’s spending bill — which would shift the burden to taxpayers, making the telecoms happy, but adding a bigger political risk for legislators and creating yearly funding uncertainty for the beneficiaries.

The fund has been caught in a familiar Washington bind over the years: Asked to do more and more, while relying on an outdated funding mechanism. Right now, it supports a bevy of programs that include broadband expansion, and some commissioners have suggested using it to build out the nation’s 5G and future 6G networks.

Some lawmakers are also considering whether to use the pool of money to fund the relatively new Affordable Connectivity Program, which helps 20 million low-income households pay their monthly internet bills. That program is funded by a separate $14 billion appropriation in the 2021 infrastructure law that’s slated to run dry next year.

Meanwhile, the source of the USF’s funding — the revenue telecom companies receive from voice traffic — has steadily dwindled as households drop their landline phones and carriers change how they classify their revenue streams.

In the Senate, where the fund falls under the jurisdiction of the Commerce Committee, Sen. Ted Cruz (R-Texas) has used his perch this year as the committee’s top Republican to publicly attack the fund.

FCC Commissioner Carr sees a market “death spiral” at play, as he’s warned for years, as shrinking pots of telecom revenue face greater demands from Washington.

Longtime Washington veterans like Clyburn also point out that the setup unduly squeezes the phone companies and older Americans, who are the most likely to still use landline phones. Although some consumer advocates argue the system burdens companies more than consumers, the consensus tends to be that the structure is out of step.

“It’s like taxing horseshoes to pay for the highway system,” Sen. J.D. Vance (R-Ohio) lamented during a May hearing on the Universal Service Fund’s challenges.

As they await court rulings, lawmakers are sporadically mulling the Universal Service Fund’s future, but no committee in either chamber has advanced legislation. Senate Commerce leaders’ May subcommittee hearing began debate on some of the bipartisan measures at hand, which would kickstart FCC proceedings on overhauling subsidy contributions and conducting further study on the feasibility of collecting money from tech companies.

“They’re tough issues, but I’m hoping we can find a path forward on some legislative ideas,” Thune, who formed the working group with Luján, said in an interview at the time.

In July, Luján maintained “offices are meeting, looking at ideas” and suggested announcements would be forthcoming. “There’s urgency around this program,” he added.

Many of Washington’s top trade groups have told POLITICO they’re girding for intensifying fights. That means more white papers, blog posts and lobbying federal regulators and Hill offices. And often attacks framing their opponents as ready to slap taxes onto the internet.

Jason Oxman, who leads the Information Technology Industry Council, a technology trade association, suggested that Big Tech firms should be thanked, not taxed, for creating telecom demand — and took a shot at telecoms: “The concern that I have is this is driven by companies that stand to benefit from handicapping their marketplace competitors with additional taxes.”

Traditional telecom companies are still on the hook for supplying the USF’s funding, but they argue the benefits of broadband largely go elsewhere — specifically to tech giants.

Angie Kronenberg, president of tech trade group Incompas, told POLITICO she isn’t worried Congress will start charging the tech giants because the proposals targeting Big Tech seem too unformed to constitute a threat. “Months have ticked by, and we really have not seen a real proposal by anyone,” said Kronenberg, whose group’s members include Netflix, Amazon and Google, in an interview early this year. “It’s not clear to me that there’s any traction whatsoever.”

Telecom industry opponents, meanwhile, are mounting their own offensives against Big Tech. One industry lobbyist organized a letter to Hill leaders in June featuring dozens of telecom companies like Oklahoma’s Chickasaw Telephone Company and Wyoming’s Silver Star Telephone Company asking Congress to “stop the free ride by passing a law requiring the largest [tech] providers to contribute to USF.”

The wait for court rulings has stoked anxiety about what could happen if a court ruling strikes down the fund and there is no stay of the decision.

Oxman, the tech leader, warned in an interview early this year that a ruling could destabilize aid for millions of consumers and hundreds of companies and institutions: “If a decision comes out,” he says, “it could explode in a minute.”

Observers aren’t optimistic that Congress will find a solution. Said Levin: “It’s really easy to tweet out ‘tax the techies.’ It’s really difficult to actually structure legislation that can get through this Congress.”

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Author: By John Hendel