One More Coming Internet Tax

In the service provider business, revenue related directly to high speed access drives revenue growth, and is the single most strategic service. That arguably is true even for funding of universal service.

Eventually, it would seem inevitable that high speed access service revenues will be taxed to support universal service programs in the U.S. market, for example.

The current problem for USF administrators is that the traditional funding mechanism--taxes on purchases of interstate and international revenues--is diminishing as use of fixed network voice diminishes.

You might well ask why that is the funding mechanism, and the answer is simply that, historically, that was where the money was, as industry profit margins were highest in those categories. Regulators and lawmakers being anything but dumb where government revenue is concerned, logically decided to tax the highest-margin services driving what once was the bulk of revenue.

It is worth noting that voice revenue trends have been through two fundamental cycles, with a third on the way.

At one time, international long distance was the highest-margin product, followed by domestic long distance. That changed fundamentally between 1997 and 2007. Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

If you want to know why USF officials seemingly constantly talk about “new revenue sources,” the decline of long distance revenues explains why that is the case.

Among proposals to reform the USF are ways to expand the base of assessable revenues (add service providers, add services taxed) or change the contribution methodology or some combination of both.

The single biggest structural issue faced by the USF is the decline in the assessable revenue base as end users move to internet based services.

Currently, service provider revenues from Internet broadband service are not part of the base of assessable revenues that contribute to the USF.

That is partly why the USF tax is about 17.4 percent.

Of the current proposals for change, one approach is to tax use of telephone numbers, which would “broaden the base.” Eventually, regulators are likely to look at taxing Internet access.

The reason is a structural problem. As more end users migrate to IP based services, the base of interstate and international revenues subject to USF contribution has decreased while simultaneously the demand for USF funds has increased dramatically, CCMI argues.

In 1998, the assessable revenue base was $80B, but in 2012 the base had declined to $66.1B, a 17 percent reduction. That is a measure of the decline in use of voice lines, and partly a decrease in use of long distance, as well as huge pricing declines for use of long distance.

In the same period, the demand for USF funds had grown from $3.9 billion to $8.5 billion, an increase of 118 percent

The FCC has capped the overall size of the USF at $12.1 billion. But the move to over the top Internet-based services means that the assessable revenue base will continue to decline, and the quarterly contribution percentage will continue to grow, even with the cap in place.

Eventually, policymakers will conclude they are better off taxing high speed access, which is where the subsidies arguably are needed, as well.