CBO Suggests Congress Review End to Phone Excise, USF Taxes
Eliminating telephone excise and Universal Service Fund taxes are options that the Congressional Budget Office suggests lawmakers consider as they works on future federal budgets, a new report said. The options are two of 188 in a report sent to the House and Senate Budget Committees last week to help Congress set priorities in its annual budgets, said CBO Director Douglas Elmendorf. The ideas in the report aren’t recommendations and they aren’t given in order of priority, he said in the report’s preface.
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“CBO regularly presents compendiums of budget options to help inform Members of Congress about the effects that various policy choices would have on spending or revenues,” the report said. This report looks at various areas for savings, including the telephone excise and USF that the CBO said may hurt industry and are at least out of touch with current telecom practices.
The report also suggests the FCC be given permanent authority to run spectrum auctions. The commission’s current power ends in 2010. “Conducting the auctions would cost the FCC about $35 million in 2013 in direct spending, reducing the net from the auctions to about $895 million over the next 10 years,” the CBO said. The proceeds probably wouldn’t be recorded until 2014. “One rationale for this option is that competitive bidding places licenses directly in the hands of the parties that value them the most,” the CBO said. This is a more efficient process than the older ones of lotteries or competitive hearings, where an applicant told the FCC why its planned use of spectrum would most benefit the public.
“Without additional spectrum, users in the densest areas could experience congestion,” the CBO said, especially with the increased demand for mobile data services. Some oppose giving FCC permanent auction authority because they believe auctions “no longer advance competition in the markets for telecommunications services.” In major cities, the price for the right to use spectrum is “so high that only very large companies can afford the licenses,” the report said. Start- up innovators have difficulty entering the market because of the dominance of incumbent telephone and cable companies. Those opposing permanent auction authority also argue that the desire for auction revenue “has caused the FCC to allocate too little of the radio spectrum to unlicensed uses, such as wireless Internet access,” which could serve rural areas.
The CBO said the FCC has allocated additional spectrum for unlicensed uses several times since 1993 and is considering other allocations, as well as allowing use of additional unlicensed low-power devices that can share parts of the spectrum without causing significant interference.
Dropping the excise tax on local telephone services would reduce budget revenue $300 million in 2010 and $800 million through 2014, the CBO said. “Because excise taxes reduce the tax base of income and payroll taxes, lower excise taxes would lead to increases in income and payroll tax revenue,” the office said. Ending USF fees would reduce federal revenue $8.8 billion in 2010 and $44.6 billion over five years. The CBO said the estimates reflect only the effect of cutting the fees. “Lawmakers could choose to reduce spending on programs funded by the USF and thus offset some of the lost revenues.”
“The main rationale for eliminating those taxes is that they have negative effects on the allocation of telecommunications resources,” the CBO said. The IRS decided in 2006, after several legal challenges, to stop collecting excise taxes on long-distance and services bundled with it, such as wireless and Internet-based phone service. Local service is still taxed, distorting consumer choices, the CBO said. The disparity in taxing policy causes consumers to base spending decisions “more on the services’ relative tax rates than on their relative costs and benefits,” the study said. “USF fees have much the same distortional effects.” Further, CBO noted, the tax policies hurt lower-income households more than higher-income, since newer communications services, which aren’t taxed, typically are used by people with access to computers and other higher-end communications devices.
But USF and excise taxes are good for the federal budget because they're “difficult to evade” and provide a reliable source of income, the CBO said. The distortions they create could be fixed by broadening the taxes to include similar services not presently being taxed, or by giving exemptions for groups such as nonprofit hospitals and educational institutions, eliminating the taxes’ regressive features, CBO said. Eliminating USF fees, the report noted, “would raise the issue of how or whether those programs would be funded.”