What’s the Federal Universal Service Fee (and Should I Care?)

Remember back when the IRS lost all of those court cases and finally was forced to recognize that it didn’t have the authority to charge a federal excise tax on most modern phone services? Has it really been almost ten years? Time flies.

In , the agency stopped collecting that illegally-collected tax, and they even refunded some of their ill-gotten gains via a temporary income tax credit.

Data from the Tax Foundation show how this affected the over-all federal tax rate on wireless telephone service:


I looked at this table and thought: “what the heck?” How is it that after dropping the federal excise tax, the total federal tax rate is higher now than before? Did they somehow sneakily add the tax back while I wasn’t looking?

The Tax Foundation explains:

[T]he elimination of the Federal excise tax was offset by a rapid increase in the Federal USF [Universal Service Fee], and the Federal USF rate more than doubled from 2.99 percent to its current level of 6.46 percent.

The Federal USF is administered by the Federal Communications Commission (FCC) with open-ended authority from Congress. The program subsidizes telecommunications services for schools, libraries, hospitals, and rural telephone companies operating in high cost areas. The Federal USF is assessed on a provider’s Interstate revenues, which the FCC deems to be 37.1 percent of the wireless bill for customers purchasing calling plans that do not distinguish between interstate and intrastate calls.

The Universal Service Fund strikes most people as a fairly benign thing, and, if you’re a believer in the usefulness of a coercive government, this is perhaps the sort of taxation and infrastructure investment you have in mind.

On the other hand, according to its audit reports, the fund holds billions of dollars in U.S. Treasury Bonds, and so in this way is also an enabler for the rest of the government’s less-savory spending.

Not that there’s much we can do about it as phone customers (though I suppose, with internet telephony services like Skype available, the need to be a phone customer at all is not necessarily so great). With the old federal excise tax, you could actually refuse to pay it, as a customer, and the phone companies would (though often only after some prodding) just report you to the government as a non-payer and leave it at that. The way the tax was set up, the customer owed it and the telephone company was merely acting as the collector.

The USF isn’t like that. The phone providers owe that fee to the government themselves. They’re not even obligated to pass the cost on to their customers at all if they don’t want to, but in practice they all do, and they do so explicitly on your phone bill so they can advertise our amazingly low rate* rather than just our rate.