Dialing for Dollars

Phone tax follies


When is a tax not a tax? When federal technology bureaucrats call it a contribution. In December 2011, the Federal Communications Commission (FCC) announced that it would raise the universal service "contribution factor" for telephone service providers to 17.9 percent, up from 15.3 percent in the final quarter of 2011. 

The rate has been rising rapidly for more than a decade. At the beginning of 2000, the  "contribution," which funds subsidized telephone service in rural areas the FCC deems underserved or overpriced, was just shy of 6 percent. 

Why the sharp rise? Because the tax—sorry, contribution—base has been dwindling. With mobile phones taking over the calling market and online options proliferating, fewer people are communicating via traditional interstate phone connections. That means higher taxes are necessary to continue funding universal service.

Jerry Ellig, a tech policy researcher at George Mason University's Mercatus Center, says the cost of adding a single new customer can be as much as $11,000, depending on the area and the service. "Because demand for local wire-line phone service is not very price-sensitive," Ellig says, "it takes a lot of subsidization to produce a small increase in subscribership."