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An Open Letter to the United States Congress: Stop the FCC from Raising Taxes on Enhanced Calling Cards

January 6, 2005

Dear Member of Congress:

On behalf of the 350,000 members of the National Taxpayers Union (NTU), I write to offer our views on a pending issue before the FCC expected to be resolved in the coming weeks. Specifically, we urge you to override the FCC should it rule against AT&T's petition for a declaratory ruling regarding the categorization of enhanced prepaid card services (WC Docket No. 03-133).

At issue is AT&T's petition to the FCC to have its enhanced prepaid calling cards categorized as an informational service rather than a telecommunications service under the Federal Telecommunications Act of 1996. By having these calling cards categorized as the latter, AT&T and other like providers would be forced to "contribute" revenues derived from these cards to the Universal Services Fund. Should the FCC deny AT&T's petition, consumers of these calling card services will be gouged by a stealth tax increase. Among the hardest hit would be members of our armed services stationed overseas.

The USF itself is little more than an inefficient tax and redistribution scheme. Why should one subset of the population (urban residents) be forced to subsidize the telecommunications services of another (rural residents)? Beyond the higher costs (both economic and social) of living in an urban area relative to a rural area, the simple fact is that people in rural areas choose to live there. A single mother in New York shouldn't have to subsidize phone service for a wealthy landowner living in Montana.

But the problem with the USF goes beyond principle. The rural companies that ultimately provide these services become direct beneficiaries as well. Advocates of the USF maintain that such a tax and transfer mechanism is necessary to induce companies to provide telecom services in these naturally costly areas. In actuality, these subsidies discourage new entrants and technologies--i.e., competition.

These generous subsidies also discourage recipient companies from economizing. A recent USA Today report cited the example of Big Bend Telephone, which serves 6,000 customers in Alpine, Texas. Last year Big Bend spent $3.6 million--or 25 percent of total operating costs--on corporate overhead alone. At the same time, the company received $9.6 million and $3.3 million in federal and state universal service funds, respectively.

One can also point to the program's documented history of fraud. The same USA Today report on the USF stated that, "the Gambino crime family was able to fraudulently draw millions from the Universal Service Fund from 1996 to 2003 by controlling a Missouri rural phone firm."

The National Taxpayers Union takes no formal position on the technical merits of AT&T's claim that these "enhanced" calling cards are in fact an informational service rather than a telecommunications service. Nonetheless, such controversies that continue to arise from these increasingly blurry regulatory distinctions created by the 1996 law serve as an example of why government meddling in the private sector should be kept to a minimum.

Rather, NTU's interest in this matter is based on our founding principle that taxpayers and consumers deserve less, not more, government interference in their economic lives. Thus, we are calling upon Congress to place the interests of taxpayers at the forefront on this issue as well.


Tad DeHaven
Economic Policy Analyst