The Lifeline program is part of the Universal Service Fund’s (USF) low-income support services, providing subsidized telephone services to low-income households. The low-income support program also includes the Link-Up program, which provides a discount off the initial installation fee for one traditional, wire line telephone service at a primary residence, or the activation fee for one wireless telephone. The Link-Up program also allows subscribers to pay the remaining amount they owe for their connection on a deferred schedule, interest-free.

The subsidies for these programs come from the USF fee paid by the telecommunications industry, which is typically passed along to subscribers as a hidden tax on their monthly telephone bill. The USF fee collects approximately $7.7 billion annually for the USF.

In 2008, the Lifeline program was expanded to allow telephone companies to provide discounted wireless service, including prepaid wireless phones in some states to certain eligible individuals. In October 2010, the Government Accountability Office (GAO) published an investigative report of the USF Lifeline and Link-Up programs which revealed drastic increases in the demands on the program from 2008 to 2009, attributable in part to the increased availability of discounted wireless service for eligible individuals. According to the Federal Communication Commission (FCC)’s March 23, 2011 proposed rule for reform of the Lifeline and Link-Up programs, Lifeline/Link-Up program spending increased from $667 million in 2000 to $1.3 billion in 2010.

Not only did the GAO report detail a dramatic increase in the use of Lifeline services, but it also revealed multiple instances of program fraud and abuse. For example, some recipients were using Craigslist to advertise the sale of Lifeline-subsidized phones and service. In other cases, Lifeline beneficiaries violated the one phone line restriction of the program by signing up for service from multiple carriers. On June 29, 2011, the FCC published final rules to address the fraud and eligibility issues highlighted in the GAO report.

On January 9, 2012, FCC Chairman Julius Genachowski outlined proposals to reform the Lifeline program. On January 10, 2012, the FCC announced it would be considering the chairman’s reform proposal to its Lifeline and Link Up program at its next meeting scheduled for January 31, 2012. In his announcement, the chairman laid out plans to close loopholes in the program’s eligibility requirements and strengthen cost controls in an effort to reduce the amount of waste, fraud and abuse. In addition, he detailed an expansion of the program to include broadband services as one of the choices individuals would be eligible to receive through the Lifeline program, emphasizing that the current service options are outdated by providing only basic telephone service. This change was outlined in the National Broadband Plan, which also proposed transforming the USF into the Connect America Fund.

The FCC should proceed with caution when considering adding broadband services to the Lifeline program. As demonstrated by the dramatic increase in demand starting in 2008 when wireless services were added to the options for low-income subscribers, adding broadband to the Lifeline program could increase financial demands. The inclusion of broadband would also place additional burdens on the Link-Up program. An additional consideration when adding broadband to the services available is the ability to use the Internet to access telephone services using Voice over Internet Protocol (VoIP) services. VoIP has its own set of issues that subscribers must address with a service provider, including making provisions for communication in the event there is a power outage, and additional equipment costs that must be borne by the end user.

The USF fee is recalculated quarterly by the FCC to ensure the USF fund will have enough capital to meet its program obligations. The contribution factor is based on demand for each of the four programs supported by the USF. While the demand for the Schools and Libraries support program and the Rural Health Care support program have remained relatively stable, with only slight increases due to economic factors, the program demands of both the High-Cost support program, which provides assistance to telephone companies that serve in high-cost areas, and the Low-Income support program have dramatically increased, with a projected demand of $657 million for the Low-Income support program (an increase of $125 million over the previous quarter) and nearly $1.2 billion for the High-Cost program for the first quarter of 2012. On September 13, 2011, the FCC announced that the universal service contribution factor for the fourth quarter of 2011 would increase from 14.4 percent to 15.3 percent in order to provide for enough collections to meet their project expenses for program support. The proposed universal service contribution factor announced for the first quarter of 2012 is expected to increase to 17.9 percent.

The telecommunications industry is one of the most heavily taxed sectors of the economy. As an example of the high taxation rates on telephone services, Citizens Against Government Waste recently received a telephone bill that included federal, state, and local taxes and fees amounting to over 30 percent of the charges on the bill. The cost burden of the USF fee for taxpayers will only continue to rise, particularly with the expansion of broadband through the Connect America Fund and the proposed addition of subsidized broadband services to the Low-Income program. As the FCC reviews the Lifeline and Link-Up programs, the commissioners should evaluate the fiscal impact of the addition of subsidized broadband services to the average middle-class American who ultimately pays for these services through the USF fee on their monthly communications bills.