The funding mechanism to pay for the Universal Service Fund is broken. The USF is funded from fees added to landline telephones, cell phones and on large business data connections that are still billed using telco special access products (T1s and larger circuits). The USF fee has now climbed to an exorbitant month tax of 20% of the portion of those services that are deemed to be Interstate by the FCC. This equates to a monthly fee of between a dollar or more for every landline phone and cellphone (the amount charged varies by carrier).

The funding mechanism made sense when it was originally created. The fee at that time was assessed on landlines and was used to built and strengthen landline service in rural America. When the USF fee was introduced the nationwide penetration rate of landlines in urban America was over 98%, and the reasoning was that those with phone service ought to be charged a small fee to help bring phone service to rural America. The concept behind universal service is that everybody in the country is better off when we’re all connected to the communications network.

However, over time the use of the Universal Service Fund has changed drastically and this money is now the primary mechanism that FCC is using to pay for the expansion of rural broadband. This pot of money was used to fund the original CAF II programs for the big telcos and the A-CAM program for the smaller ones. It’s also the source of the Mobility Fund which is used to expand rural cellular coverage.

Remember the BDAC? That’s the Broadband Deployment Advisory Committees that was created by Chairman Ajit Pai when he first took the reins at the FCC. The BDAC was split into numerous subcommittees that looked at specific topics. Each BDAC subcommittee issued a report of recommendations on their topic, and since then little has been heard from them. But the BDAC subcommittees are still meeting and churning out recommendations.

The BDAC subcommittee tasked with creating a State Model Code has suggested the broadening of the funding for the USF. This is the one committee that is not making recommendations for the FCC but rather suggesting ideas that states ought to consider. The Committee has suggested that states establish a fee, similar to the federal USF fee and use the fee to expand broadband in each state. Many states have already done something similar and have created state Universal Service Funds.

The recommendation further suggests that states tax anybody that benefits from broadband. This would include not just ISPs and customers of ISPs, but also the big users of the web like Netflix, Google, Amazon, Facebook, etc. The reasoning is that those that benefit from broadband ought to help pay to expand broadband to everybody. The BDAC recommended language has been modified a few times because the original language was so broad that almost everybody in the country would be subject to the tax, and we’ve learned over years that taxation language needs to be precise.

This is not the first time that this idea has been floated. There are many who suggested in the past to the FCC that USF funding should be expanded to include broadband customers. Just as telephone customers were charged to fund the expansion of the telephone network it makes sense to tax broadband customers to expand broadband. But this idea has always been shot down because early in the life of the Internet the politicians in DC latched onto the idea of not taxing the Internet. This made sense at the time when we needed to protect the fledgling ISP industry – but that concept is now quaintly obsolete since Internet-related companies are probably collectively the world’s biggest industry and hardly need shielding from taxation.

AT&T is a member of this BDAC subcommittee and strongly supports the idea. However, AT&T’s motivations are suspect since they might be the biggest recipient of state USF funds. We saw AT&T lobbyists hijack the state broadband grant program in California and grab all of the money that would have been used to build real rural broadband in the state. The big carriers have an overly large influence in statehouses due to decades of lobbying, and so there is a concern that they support this idea for their own gain rather than supporting the idea of spreading broadband. We just saw AT&T lobbyists at the federal level sneak in language that makes it hard to use the e-Connectivity grants from competing with them.

But no matter how tainted the motivation of those on the BDAC committee, this is an idea with merit. It’s hard to find politicians anywhere who don’t think we should close the broadband gap. It’s clear that it’s going to take some government support to make this work. Currently, there are a number of state broadband grant programs, but these programs generally rely annually on allocations from the legislature – something that is always used annually as a bargaining chip against other legislative priorities. None of these grant programs have allocated enough money to make a real dent in the broadband shortfalls in their states. If states are going to help solve the broadband gap they need to come up with a lot more money.

Setting up state USF funds with a broad funding base is one way to help solve the rural broadband divide. This needs to be done in such a way that the money is used to build the needed fiber infrastructure that is needed to guarantee broadband for the rest of the century – such funds will be worthless if the money is siphoned instead to the pockets of the big telcos. It makes sense to assess the fees on a wider base, and I can’t see any reasonable objection against charging broadband customers but also charging big broadband-reliant companies like Netflix, Google, Amazon, and Facebook. The first state to try this will get a fight from those companies, but hopefully the idea of equity will win since it’s traffic from these companies that is driving the need for better broadband infrastructure.