Research & Commentary: State Universal Service Fund Reform

Published January 3, 2013

First established as part of the Telecommunications Act of 1996, the Federal Universal Service Fund was designed to provide telephone service to underserved areas of the country. Soon after, individual states began to launch universal service funds to target underserved areas in their states. USFs use fees applied to telephone bills to prop up weak or inefficient telecom providers that operate in underserved areas and would not survive in the marketplace without subsidies. 

As these funds’ original intent has run its course, they have proven to be an inefficient and unnecessary use of taxpayer dollars. As a result, the federal government and several state legislatures have begun efforts to refocus their USFs as mechanisms for expanding broadband Internet access, even though 95 percent of the country already has access to broadband. 

The additional expansion would be very expensive, burdening consumers and providers alike and further distorting the telecom market. Using the USF as a model for the broadband expansion is also problematic given the USF’s mixed success in improving telecommunications services. In a study examining the revenues and expenditures of the USF between 1998 and 2008, Scott Wallsten of the Technology Policy Institute found $0.59 of every dollar went to administrative and overhead costs rather than actual services. 

USFs are unnecessary slush funds that actually slow telecom implementation and innovation and pale in effectiveness when compared with the private sector’s ability to grow the nation’s communications infrastructure. Eliminating government-created barriers to private broadband investment, slashing excessive telecom taxes, and freeing subsidized areas for market competition are more taxpayer-friendly and efficient ways to expand telecom access. 

Public policy should avoid favoring one company over another and instead strive to foster a more neutral, competitive, and undistorted marketplace. Public policy also should be transparent, instead of relying on “backdoor” taxes and complex cross-subsidies as USFs do. 

The following documents offer additional information on sound telecom policy and Universal Service Fund reform.

Ten Principles of Telecom Policy
This booklet, part of The Heartland Institute’s Legislative Principles series, provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state telecom policy. It presents the ten most important principles of sound telecom policy, from regulatory reform to the government’s role in expanding broadband. 

Inclusion, Not Infrastructure: Rethinking Universal-Service Policy in a Broadband Era
Steven Titch of the Reason Foundation argues universal service funds cannot follow the same model as utilities because USFs require continued investments over time to keep up with current technologies: “While the goal remains to bring inexpensive broadband connectivity to as many people as possible, a more enlightened approach shifts away from large infrastructure projects to making the benefits of broadband relevant to all classes of potential users.” 

‘Universal Service’ Telephone Subsidies: What Does $7 Billion Buy?
This paper documents the ineffectiveness of subsidizing universal service at the expense of taxpayers, providing an overview of how the $7 billion federal Universal Service Fund is distributed and how inefficient it has been. 

High-Cost Universal Service Support
The Federal-State Joint Board on Universal Service recommends “the Federal Communications Commission address the long-term reform issues facing the high-cost universal service support system and make fundamental revisions in the structure of existing Universal Service mechanisms.” 

The Universal Service Fund: What Do High-Cost Subsidies Subsidize?
The Universal Service program in the United States currently transfers about $7.5 billion per year from telephone subscribers to certain telephone companies. A large research literature documents the inefficiency and ineffectiveness of these subsidies, raising the question of where the money goes. Using data submitted by about 1,400 recipients of high-cost subsidies in 1998–2008 to explore this question, Scott Wallsten finds of each dollar distributed to recipient firms, about $0.59 goes to “general and administrative expenses”—overhead such as planning, government relations, and personnel—instead of making telephone service more affordable. 

Universal Service Fund Reform: Expanding Broadband Internet Access in the United States
Jeffrey Rosen of the Brookings Institution examines various reform proposals for the Universal Service Fund, the National Broadband Plan, and critiques of both the USF and the Connect America Fund. 

Heartland Institute Policy Study No. 113: Taxes and Fees on Communication Services
David Tuerck, Paul Bachman, Steven Titch, and John Rutledge describe the destructive consequences of taxes and fees on communication services and call for tax and regulatory reform. 

A State Legislator’s Guide to Telecom Policy
Barry M. Aarons and Solveig Singleton of the Institute for Policy Innovation explain in this Legislator’s Guide the issues public policymakers face in considering the future of the U.S. telecommunications. 

Federal and State Universal Service Programs and Challenges to Funding
In this 2002 study, the United States General Accounting Office examines the federal and state universal service programs, describing how they operate; how states set rates; how costs vary across urban, suburban, and rural areas; and how telephone service via Internet-based technology was developing and its potential impact on universal service programs. 

Replacement of the Legacy High-Cost Universal Support Fund with a Connect America Fund Key Economic and Legal Considerations
Christian Michael Dippon of National Economic Research Associates and Christopher Huther and Megan Troy of Preston Gates Ellis & Rouvelas Meeds examine the complexities involved in the FCC’s proposed Connect America Fund and Internet access tax and discuss the likely impact of the proposed reforms on industry performance.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].