FCC Taxes Create Significant Efficiency Losses to the U.S. Economy

The FCC chose the taxation method applied to interstate telephone service which likely maximizes the cost to the economy of raising the revenue to provide the Internet discounts.

The nation's telecommunications network is regulated by a patchwork of subsidies and taxes overseen by the federal government through the Federal Communications Commission (FCC) and by the 51 state regulatory commissions (including the District of Columbia). To further complicate this picture, Congress has taken to raising taxes on specific sectors of the economy, including telecommunications, to pay for social programs. In Taxation by Telecommunications Regulation(NBER Working Paper No. 6260), NBER Research Associate Jerry Hausman calculates the efficiency cost to the economy from the imposition of one such tax increase -- on interstate access charges for long distance calls -- the revenue from which goes to subsidize school and library access to the Internet. Using the techniques of public finance analysis, he finds that the "cost to the economy is extraordinarily high compared to other taxes used by the Federal government."

Specifically, he estimates that the program's cost runs around $2.25 billion annually. Hausman calculates that the method chosen by the FCC to raise that money carries a cost to the economy of $2.36 billion. In other words, the efficiency loss to the economy for every $1 raised to fund the Internet access is an additional $1.05 to $1.25.

Congress left to the FCC how best to fulfill its mandate that all users of interstate telephone service help pay for school and library Internet access. Unfortunately, "The FCC chose the taxation method applied to interstate telephone service which likely maximizes the cost to the economy of raising the revenue to provide the Internet discounts," says Hausman.

He argues that it would be far more efficient to generate the subsidy money by increasing general tax revenue. Although there is no one number that everyone rallies behind when it comes to estimating the value of the marginal efficiency loss to the economy from raising general taxes, the range of estimates in four major studies he cites is reasonably close. They all result in less than one-third the efficiency loss created by the FCC and its method of higher access rates on interstate long distance.

Of course, the political reality may be that raising general revenues is out of the question. So Hausman also devises several alternative ways the FCC could raise money for the Internet subsidy at a far lower cost to the economy. One is to hike the Subscriber Line Charge (SLC), a monthly fixed fee of $3.00 for residential line and $6.00 for business. That fee was established in 1984. The FCC would have to raise the SLC by about $1.50 a month, but in real terms the increase would not quite bring the fee back to its 1984 value. The efficiency effect would be very small, too.

Alternatively, the FCC could use some of the money it raises by auctioning spectrum. It could charge Internet users the marginal cost of the telephone network, although it is unclear how much revenue that would generate. The bottom line for Hausman is this: too many FCC decisions are made without adequately considering their economic effects, and the neglect is costing the economy billions of dollars -- or even tens of billions -- a year. "Telecommunications regulation at the federal level has always recognized the public interest standard as one of the main bases for regulation," says Hausman. "The public interest standard should recognize economic efficiency as one of its primary goals."