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The Honolulu Advertiser
Posted on: Thursday, July 20, 2006

Rural phone line subsidies 'perverse'

By Jon Van
Chicago Tribune

CHICAGO Rural phone-service subsidies are so bloated and inefficient that providing wireless or even satellite phones is cheaper, an economic analysis prepared for a senior-citizen advocacy group suggested yesterday.

Taxes to support the universal service fund, which is intended to pay for higher costs of serving rural areas, are growing so fast as to force some low-income citizens to drop current phone service, said Thomas Hazlett, a George Mason University economist who prepared the analysis for the Seniors Coalition.

"It's perverse when shifting tax money around for the universal service fund results in more people leaving the network than joining it," Hazlett said.

Totaling more than $7 billion a year, universal service outlays have nearly tripled in the past decade. The fund is now financed by a tax of more than 10 percent on long-distance phone service, but the Federal Communications Commission is looking for new revenue sources.

Last month, the FCC decided to raise the tax on wireless customers and to impose the tax for the first time on Internet telephony customers, but even those changes are unlikely to keep up with rising expenditures.

FCC Chairman Kevin Martin has indicated he favors shifting to a flat tax of $1 or more on every telephone number issued.

Seniors and low-income customers who seldom place long-distance calls would see their phone bills rise if that happens, said Flora Green, a national spokeswoman for the Seniors Coalition.

"The fund should be capped and then reviewed from top to bottom," Green said at a teleconference to unveil the Haz-lett study.

Educational groups have also expressed reservations about the change, citing universities that maintain thousands of phone numbers for student dormitories where long-distance calling isn't permitted.

Roger N. Bonnett, telecommunications manager at Wake Forest University, estimates that if Martin's plan is adopted, his university's universal service tax payments will jump from less than $5,000 a year to about $84,000.

Large phone carriers have endorsed Martin's idea, embracing its simplicity and predictability. But they have called for exemptions for low-income customers with lifeline phone service and reductions for wireless customers with multiple cell phones under family-based plans.

Hazlett said that reforming the current universal service fund is very difficult because rural phone companies that benefit directly from the plan have political clout in Congress. They beat back efforts in the Senate last month to impose a cap on expenditures.

Universal service subsidies have become so widespread that rural phone companies on average collect only 27 percent of their revenues from customer payments, Hazlett found. Even so, many rural customers are opting to drop traditional wired service to go wireless.

"It's cheaper and they like the mobility," Hazlett said. "About 5 percent of rural households have dropped fixed-line service to go wireless."