Research & Commentary: The Connect America Fund and Broadband Internet Taxes

Published September 13, 2012

In 2011 the Federal Communications Commission (FCC) created the Connect America Fund (CAF) by taking $4.5 billion from the Universal Service Fund (USF) designed to provide advanced telecommunications services. 

The FCC stated its goal was further expansion of broadband Internet services to areas of the country it considers underserved. Recently the FCC has proposed expanding the CAF by creating a new fee to be tacked onto the bills of all broadband Internet connections nationwide, even though nearly the entire nation (around 95 percent) already has access to broadband. 

Steven Titch, a policy advisor on telecom issues at The Heartland Institute, questions whether the USF model is appropriate for improving broadband Internet deployment: “While ratcheting up the taxes and subsidies, the FCC still has not adequately addressed the reason why rural universal service fees continue to increase even as [fewer households lack broadband]. The FCC also refuses to consider the impact advances in wireless and satellite technologies might have in rural areas, and whether market forces can actually deliver them without subsidy.” 

Using the USF as a model for the CAF is problematic given the USF’s mixed success in improving telecommunications services. In a study of 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 instead of actual services. 

CAF is an unnecessary slush fund that actually slows telecom implementation and innovation and pales in effectiveness when compared with the private sector’s ability to grow the nation’s broadband infrastructure. The proposed broadband Internet tax would hit broadband users everywhere for billions of dollars of new government spending. This would put an unnecessary tax on consumers to do something the market is already handling quite effectively. 

The following documents discuss the proposed CAF and the effects of Internet service taxes, from multiple perspectives. 

FCC Eyes Tax on Internet Service
Brendan Sasso of The Hill discusses the Connect America Fund and the Federal Communications Commission’s proposal to tax broadband Internet service. 

Why Does the FCC Want to Tax Internet Access?
Andrew Couts of Digital Trends examines the FCC’s Internet tax proposal and outlines the positions of supporters and opponents of the fund and new fees. 

The Case for Tax-Free Internet Access
Daniel Castro of the Information Technology and Innovation Foundation discusses the advantages of tax-free Internet access and argues for keeping in place the current moratorium on Internet access taxes. “State tax policy should reflect the fact that Internet access is not merely a consumer good, but rather a tool used by producers to increase economic efficiency and lower the cost of production,” he writes. 

Broadband Internet Access and the Digital Divide: Federal Assistance Programs
Lennard G. Kruger and Angele A. Gilroy of the Congressional Research Service examine the “digital divide” between broadband service haves and have-nots. They find the key issue is “how to strike a balance between providing federal assistance for unserved and underserved areas where the private sector may not be providing acceptable levels of broadband service, while at the same time minimizing any deleterious effects that government intervention in the marketplace may have on competition and private sector investment.” 

The Value of Broadband and the Deadweight Loss of Taxing New Technology
In this paper, Austan Goolsbee analyzes the impact taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Goolsbee finds that applying a tax to broadband in 1998 would have reduced the quantity and generated a large deadweight loss in the conventional model, and when the analysis accounts for the fixed costs of entering new markets, it shows taxes would have delayed entry in several markets. 

The Case for Tax-Free Internet Access: A Primer on the Internet Tax Freedom Act
Daniel Castro of the Information Technology and Innovation Foundation explains why Congress should make the current moratorium on Internet access taxes permanent and eliminate the grandfather clause that allows some states to tax Internet access at the expense of the nation as a whole. The report also discusses the legislative history of the Internet Tax Freedom Act and the national benefits of tax-free Internet access. Finally, the report reviews and refutes the objections of opponents of the moratorium. 

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

How the FCC Sees Broadband’s 95% Success as 100% Failure
Writing in Forbes, Larry Downes discusses the Federal Communications Commission’s conclusions on broadband implementation in its eighth annual “Broadband Progress Report.” Despite new statistics showing 95 percent of all Americans have access to broadband Internet from cable, DSL, fiber, or other wired services, the FCC argues broadband deployment is too slow. Downes says that is absurd and will lead to further costly regulations to fix a non-problem. 

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 that 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. 


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].