- The telecom industry still has hope the Supreme Court will uphold the Universal Service Fund’s legality
- But politics and technological changes present a rocky path to reform
- The USF now has a nearly 37% contribution rate, as traditional telephone revenues continue to shrink
The Universal Service Fund’s (USF) day in court came and went, and the U.S. telecom industry still has hope the subsidy will live to see another day. But even if the Supreme Court deems the USF framework constitutional, there’s still no easy path to reform the program.
The Supreme Court this week heard arguments related to the Fifth Circuit’s decision that the USF’s funding method is unconstitutional. While it’s by no means certain, New Street Research Policy Analyst Blair Levin said the current USF framework is “more likely than not to be upheld.” The bigger question is what happens next.
“We think the current system will survive the legal threat, but the situation remains uncertain and unstable due to changing political incentives and technological changes,” Levin said in a note Wednesday.
Telecom providers are required to contribute a certain percentage of their interstate and international service end-user revenues. The problem is the contribution rate continues to go up (as of now, it’s 36.6%), but those revenues are shrinking as more people subscribe to broadband over traditional telephone services.
The contribution base has fallen from $288 billion in 2014 to $116 billion today, said U.S. Solicitor General Sarah Harris, who argued on behalf of the FCC at the Supreme Court hearing.
“That has to do with the fact that the carriers' revenues for intrastate telecommunications has fallen, not with respect to some out-of-control program,” she said.
What the Fifth Circuit ruling claimed
The Fifth Circuit in its ruling claimed the USF is a “misbegotten tax,” because the Federal Communications Commission (FCC) sub-delegated the taxing power it received from Congress to the Universal Service Administrative Company (USAC), a private corporation.
USAC oversees the four smaller programs under the USF umbrella: Connect America Fund, Lifeline, E-Rate and Rural Health Care.
“At its heart, this case is about taxation without representation,” argued R. Trent McCotter, the attorney representing Consumers Research, the public interest group that’s challenging the USF’s legality.
“The amount collected [for the USF] is now 20 times the size of the FCC's entire annual budget,” he said.
Questions around the USF’s sustainability arise as the Trump administration aims to gut federal spending via the Department of Government Agency (DOGE). Further, FCC Chair Brendan Carr this month kicked off a crackdown on telecom regulations, which perhaps could also impact the fate of the USF.
In Levin’s view, three Supreme Court justices (the ones appointed by Democrat presidents) will likely vote to uphold USF, while Justice Neil Gorsuch, who said “we have a tax that’s unlike any other tax that this Court’s ever approved,” will probably vote to overturn it. But the other justices could vote either way.
For example, Justice Comey Barrett asked the FCC’s counsel what if, the IRS had the power to tax food to provide meals to the poor? This suggests she has some concerns about upholding the current USF framework, Levin said.
Justice Brett Cavanaugh meanwhile seemed to lean towards overturning the Fifth Circuit but expressed concern about the lack of a cap on the USF contribution rate.
The future of USF post-Supreme Court
The Supreme Court’s decision may increase the urgency for USF reform, but how that reform pans out naturally depends on how the Broadband Equity, Access and Deployment (BEAD) program plays out, Levin noted.
We already know that the Department of Commerce plans to revamp BEAD with a “tech-neutral” approach, which likely entails less fiber deployments and more satellite and fixed wireless technologies.
What does that mean for the USF? Well, if the U.S. government deems satellite broadband service is just as good or better than fixed terrestrial technology, that “weakens the economic and political rational” of USF, said Levin.
The Supreme Court will probably make its final verdict sometime in June. In the meantime, the telecom industry remains cautiously optimistic.
Michael O’Reilly, former FCC Commissioner and advisor to the Keep America Connected Coalition, said those who want to prevent an immediate USF shutdown “heard much to be encouraged today,” but that doesn’t mean the USF is in the clear.
“After listening to today’s oral arguments, I remain convinced that Congress should prepare a short-term USF solution to address the issues before the court,” O’Reilly said in a statement.
Joseph Wender, executive director of the Schools, Health & Libraries Broadband (SHLB) Coalition, similarly said he was hopeful the Supreme Court will rule the USF is constitutional. But he also stressed we can’t forget the program’s “human impact.”
“Millions of Americans, students, library patrons, healthcare providers and so many others rely on the universal service fund every day to learn, to work, to receive healthcare and stay connected,” he told Fierce.
“So there are real world implications if the Supreme Court rules against universal service,” Wender concluded.