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Democracy & Technology Blog Pennsylvania repeals a hidden phone tax

The Pennsylvania Public Utility Commission (PUC) last week voted 5-0 to reduce intrastate access charges for long distance carriers by an estimated $50 million. This is significant because continued subsidies for dial tone diverts private investment needed for broadband.
Pennsylvania historically has been at the forefront in promoting competition in telecommunications and reforming rates to advance broadband. Today, virtually every telecom carrier in the state is providing broadband. But broadband facilities will be constantly challenged to deliver more data at faster speeds.
Broadband providers will need to spend $350 billion in the next few years to make 100 megabits-per-second broadband service available to all Americans, according to the Federal Communications Commission.

Hidden in the long-distance fees is a tax for subsidizing local telephone companies that serve remote areas where population densities are low and the cost of providing phone service is high.
The FCC has removed these harmful implicit subsidies from interstate long-distance, and a number of states have reformed their own intrastate rates. Pennsylvania has already made significant reductions. This is one reason long-distance rates have fallen dramatically in recent years. The nationwide average price of a long-distance call was 15 cents per minute in 1992. By 2004, the average price was 6 cents, a decrease of 60%.
The National Broadband Plan recommends that states reduce remaining intrastate rates in equal increments over a period of two to four years. The plan’s goal is for in-state long-distance charges to mirror interstate rates, which are typically lower. The interstate rates fully compensate local telephone companies for connecting toll calls, the FCC has concluded. Several states have already established complete parity between interstate and intrastate rates, including Georgia, New Jersey and Tennessee.
These hidden taxes hinder the transformation of America’s networks to broadband, since only single-purpose legacy telephone networks qualify for the subsidy. All-Internet Protocol (IP) networks capable of providing broadband Internet access, video and voice are ineligible.
Many look to all-IP networks to promote economic growth, jobs and competitiveness, and to provide new opportunities to educate children, deliver health care, manage energy and ensure public safety. Aside from all of these benefits, IP networks can also substitute for traditional telephone networks.
A policy which diverts badly needed funding from investments in multiple purpose networks for the maintenance of obsolete single-purpose facilities is wasteful and short-sighted.
Defenders of the tax argue that telephone subsidies are necessary to maintain affordable communications service in areas that are costly to serve. But telephone companies have opportunities to earn new revenues from wireless, broadband Internet access and video services. They can also use IP networks to deliver voice services at less cost than maintaining old telephone networks.
Telephone companies are no longer the sole provider of voice service. Nearly every consumer can choose between a traditional landline phone company, cable operators who offer voice service and mobile phones, and competition between these providers dictates the prices that consumers pay.
Corporate welfare for telephone companies gives wireless and voice-over-IP providers a competitive advantage in areas of the state which generate the subsidies, while placing them at a competitive disadvantage in areas that are served by phone companies who receive the payments. To the extent that rural broadband subsidies are necessary, there are alternatives that would do far less damage to competition than inflated intrastate access charges.
Technology and competition have transformed the telecommunications industry. Designed for a monopoly era that did not include mobile phones or the Internet, inflated intrastate access charges are inappropriate in today’s dynamic, competitive marketplace. By eliminating this hidden tax, the Pennsylvania is helping facilitate maximum investment in advanced networks that will deliver better value for consumers.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.