Rethinking Old Broadband Subsidies

In the last decade, a multitude of ambitious programs to “bridge the digital divide” have been discussed and debated. Many of them have been implemented. Few of them have moved the needle, even as the coronavirus pandemic highlights the need to expand connectivity to unserved areas.

In 2016, the Federal Communications Commission (FCC) expanded its Lifeline program (which was launched in the 1980s to help poor Americans afford landline phone service) to subsidize broadband internet for low-income households.

The FCC’s logic was tenuous from the start. In its official order, the FCC cited a 2015 report by the Pew Research Center to show that low-income consumers adopt broadband at much lower rates than the more affluent. The same Pew report, however, also revealed that the income-based gaps have significantly narrowed in 15 years, without direct government assistance, and that the fastest growth in broadband adoption has come from low-income households. And while the “digital divide” is far from eliminated, low-income households continue to make rapid progress.

Moreover, telecommunications carriers had already begun to address the “digital divide” prior to the FCC’s 2016 decision. For example, the GAO found that several providers operating in at least 21 states were “offering in-home non-Lifeline broadband wireline support for less than $10 per month to individuals that participate in public-assistance programs, such as SNAP, TANF, or public housing.”

Troublingly, despite serious concerns about the Lifeline program’s integrity and cost-effectiveness, the FCC declined to impose any limits on future Lifeline spending. In 2017, the program spent $1.3 billion, much of which did not go to its intended recipients.

For years, the Lifeline program has been plagued with waste and abuse. Last year, the FCC’s inspector general issued a report warning of “pervasive, fraudulent practices that violate program rules and divert monies from the intended beneficiaries of the program.”

A 2017 investigation by the nonpartisan Government Accountability Office (GAO) found that the 2,000 telecommunication carriers the FCC relies on to verify subscriber eligibility for the Lifeline program may have financial incentives to enroll as many people as possible, whether or not they meet income thresholds. The GAO was unable to confirm whether 36% of Lifeline subscribers qualified for program enrollment.

Although the FCC has taken steps to address these concerns by creating a national eligibility verifier, it’s unclear if it has the resources needed to make a significant dent. Even after years of planning, officials reported that “in some states/territories, constraints within the agencies that manage the eligibility data…have made it difficult to establish a connection by the end of 2019.”

And while there is evidence that the Lifeline program has helped increase subscribership among low-income households, the total impact has been small. One analysis found that increasing Lifeline spending by 10 percent would increase wireless penetration from 0.08 percent to 0.09 percent, at a cost of up to $2,078 for the marginal user — a significant taxpayer expenditure for little societal benefit.

Policymakers seem to forget that consumers — especially those with low incomes — respond to price incentives. Taxes and fees for wireless service make up about 22 percent  of the average customer’s bill — three to four times higher than the typical state’s general sales tax rate. Even alcohol taxes, which are explicitly designed to discourage drinking, rarely reach such astronomical levels. Yet lawmakers continue to increase fees and surcharges, while at the same time promising to make wireless services more affordable.

For decades, the Universal Service Fund — which finances the Lifeline program, among others — has generated revenue by imposing fees on interstate telephone services like long distance calls. As the telecommunications market evolves, these interstate revenues are drying up fast. Instead of imposing ever-greater financial burdens on wireless users, Congress either needs to fund universal access programs with general taxes or limit the level of spending. Targeted subsidies through programs Lifeline can help narrow the “digital divide,” but more has to be done to ensure that funding flows to truly needy households and that wireless service taxes don’t prevent low-income American from purchasing these services on their own.

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