The Cost of Free Phones

Last week, a video made the rounds of a woman screaming at the top of her lungs for the re-election of President Obama because, according to her, Obama had given her a free cell phone.  The video made for great fodder for bloggers, with each side of the partisan divide giving their take.  But many might be wondering, what is this woman talking about?  Did President Obama really somehow provide this woman with a free cell phone? Sort of — if you count the Universal Service Fund (USF) as an extension of President Obama.

The USF is a pool of money funded by fees tacked on to the phone bills of consumers for the purpose of subsidizing phone service (and now Internet service) for low-income people.  The USF was created through the Telecommunications Act of 1996, which called for money to be set aside to enable telecommunications capabilities for people and schools, libraries and other public spaces.  What the woman in the video is referring to is a program where money is taken from the fund to pay for cell phones, through providers such as Assurance Wireless and Tracfone Wireless, to pay for the cell phone service of those who claim they can’t afford it.

This incident allows us to look at what we’re really paying for when we pay our cell phone bill.  Cell phone taxes are absurdly high.  The average tax on a cell phone bill is over 16%, with 5 states having taxes that over 20%.  And one of the problems with the exorbitant taxes and fees that government adds onto cell phone bills of consumers is the way they do it.  Bills have become such a maze of weird sounding names and acronyms that most people don’t realize that such a large piece of their monthly bill goes towards the government, to subsidize things like the USF and free cell phones.

To top it off, the USF has shown to be severely mismanaged.  In a report released last year, the Technology Policy Institute showed that 59 cents out of every dollar in the USF goes towards bureaucratic waste—administrative and personnel fees—rather than what it was intended, which is to provide telecommunications to people and areas that need it.  Although much of this money, over $8 billion, is now be diverted to a new a fund that will help build out broadband service, there’s no indication that any steps will be taken to make sure the problems with waste are corrected, as ACI’s recent study shows.

When incomes are shrinking and the economy is not recovering at a fast enough pace, taking money out of consumer’s pockets to pay for non-essential services for others seems like a poor decision.  Exposing consumers to a scenario where 20% of their bill is made up of an assortment of taxes and fees paid to keep a bureaucracy running and government handouts continuing is bad for consumers and bad for the economy.

Zack Christenson writes on digital tech policy for the American Consumer Institute

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