Debate Over 'Gore Tax' Heats Up

(June 4, 1998)  Battle lines are being drawn over the "Gore Tax" -- a charge on phone bills used to pay for the Federal Communications Commission's expanding universal service programs.  The controversy is not presently over whether there should be a tax, but rather, whether the public should be informed about the tax on their phone bills.  Fearing that such information could erode public support for the Schools and Libraries fund (the "e-rate"), FCC Chairman Kennard wants to stop phone companies from revealing such information.

Recent actions by long distance phone companies have heated the controversy.  MCI Communications announced Tuesday that it will bill its customers for the contribution which the FCC requires it to make to support its universal service programs.  This follows upon a similar announcement from AT&T last week.  However, what has Kennard seeing red, is that AT&T and MCI plan to tell their customers on their bills what the charge is for.

These announcements prompted William Kennard, who is one of the main architects of the Schools and Libraries program, to sharply criticize AT&T and MCI, and set an FCC meeting for next Tuesday to take action against AT&T and MCI.

Vice President Al Gore has been frequently touting the Schools and Libraries program as the Clinton/Gore administration's plan to connect every classroom in America to the Internet by the year 2000.  In these election campaign style events Gore does not mention the $2.2 Billion per year "tax" which is ultimately being paid by phone users to fund the government subsidies which constitute the program.  It is these speeches which have lead others to label the charges on phone users the "Gore Tax."  (Al Gore's office did not return Tech Law Journal's telephone call requesting comment.)

MCI Files New Tariff With FCC

MCI Communications filed a new tariff with the FCC late on Tuesday.  The filing does not contain the actual language that will appear in customer bills; it merely states that customers will receive notice.  Beginning July 1 residential and small business customers will be billed 5.9% of their total monthly charges for long-distance interstate and international calls to support universal service.  MCI has already been charging large business customers 4.4% of their long-distance bills, and on August 1 will increase the rate to 4.9%.

"It makes good business sense to let your customers know what they are paying for phone service, and what they are paying for federal programs," explained MCI spokesman Claire Hassett in a telephone interview on Wednesday.

Hassett says that MCI does not oppose any universal service programs.  Rather, MCI is "concerned about is how the fund is collected."  MCI wants local, rather than long distance, providers to collect the money.

AT&T's Announcement

AT&T filed a tariff revision with the FCC last week.  However, AT&T also disclosed the exact language that will appear on its bills to customers.

"Last year, the FCC set up a new Universal Service Fund to help provide affordable telephone service and give schools and libraries access to advanced services like the Internet.  AT&T must contribute to this Fund and will assess a "Universal Connectivity Charge" (UCC) of about 5% on your monthly bill starting in July.   The FCC has also reduced the fees AT&T pays local phone companies to connect toll calls.  That's one reason our prices have come down over the last decade.   For information about UCC, call 1-800-532-2021."

Chairman Kennard's Reactions

FCC Chairman Kennard promptly criticized both announcements.  He termed AT&T's action "premature, unwarranted."  After MCI's filing he stated that phone companies "should not take advantage of consumers by overbilling their customers and then blaming it on the government."

The FCC created the Schools and Libraries Corporation to administer FCC defined subsidies for telecommunications, Internet access, and computer networking hardware, software and installation.  The basis for its doing so is Section 254(h) of the Telecommunications Act of 1996 which instructed the FCC to extend universal support to "telecommunications" for schools, libraries, and rural health care providers.  (The General Accounting Office has issued a Report that the Schools and Libraries Corporation is illegal.)

A regulatory attorney with a keen appreciation of legal fiction, Kennard, in his frequent public addresses describes the program as "telecommunications", even though the most of the money is going for hubs, routers, servers, server software, and other components of computer networks.

In reaction to the phone company announcements, the Commission scheduled a meeting for Tuesday, June 9 to "consider proposals to ensure the accuracy and completeness of billing disclosures made by telecommunications carriers."  (FCC representatives refuse to disclose to Tech Law Journal the content of the proposal(s) that will be considered by the FCC at this meeting.)

Commissioner Harold Furchtgott-Roth

While William Kennard is Chairman of the FCC, he is just one of five Commissioners who make decisions by majority vote.  The FCC is far from unanimous.  Commissioner Harold Furchtgott-Roth has long dissented that the FCC was never given authority from Congress to provide schools and libraries with anything more than "telecommunications" services.  Moreover, rather than supporting Chairman Kennard, he released a statement over the weekend praising AT&T for its plans to inform consumers in its monthly bills.  "On the issue of informing the public, AT&T is on the right side. I salute them."

In Furchtgott-Roth's view: "Six months ago, the Federal Communications Commission imposed on American consumers a new tax on telecommunications services. It is a tax that is paid by the consumer either through higher rates or through rates that would have been lower without the tax.  Surely, American consumers must know they are paying this tax. No, the sad fact is that most American consumers do not even know that they are paying this tax. It does not appear on most bills.  The ignorance of most American consumers about this tax is not an accident. It is a planned ignorance. If American consumers knew about the tax, they might not want to pay it."

Furchtgott-Roth also stated in his June 1 statement that: "The Schools and Libraries Corporation, which disburses funds from the new tax, has received requests for approximately $2 billion for 1998. Of this amount, approximately $700 million is for telecommunications services. The remaining requests of approximately $1.3 billion are for what has euphemistically been described as "inside wiring," but, in fact, is more accurately described as "internal computer networks," equipment and plant not contemplated, much less mandated, for discounts under the Telecommunications Act of 1996."

Furchtgott-Roth's views on the question of phone company bills are shared by Commissioner Michael Powell.  Powell recently wrote in his Dissent to the FCC Report to Congress on the SLC that:

"I am increasingly troubled by the suggestion, evidenced in the Report, that carriers should conceal their universal service contributions or not allow carriers to recover such contributions from consumers. Section 254(e) of the Act expressly mandates that universal service support be "explicit." 47 U.S.C. § 254(e). Further, as the Report recognizes, carriers have the flexibility to decide how they will recover their universal service contributions, and I doubt the Commission has authority to prevent carriers from recovering from their customers. My fear is that, rather than accept our apparent lack of authority to prevent carriers from passing their contributions on to their customers, the Commission will continue down the road, as evidenced in the Report, of suggesting that politically-unpopular methods of recovering such contributions (i.e., line items on consumer telephone bills) somehow amount to fraud or misrepresentation."

Sen. John McCain

Sen. John McCain (R-AZ), Chairman of the Senate Commerce Committee, which has jurisdiction over the FCC, is displeased with the actions of the FCC, and made this clear in an open letter to Chairman Kennard.

Sen. McCain criticized Kennard for pressuring long distance phone companies "into trying to conceal from consumers the added costs of funding subsidy programs established by the Commission." He continued:

"Consumers have an absolute right to know how much their bills are going up and why their bill are going up. And they have a right to that information being presented to them accurately, concisely, and understandably.

The Commission ... must refrain from interfering with a carrier's prerogative to truthfully identify any consumer bill increases as a Commission imposed tax required to subsidize identified programs."

However, McCain did not limit his lecture to billing practices. He criticized the FCC's handling of the schools and libraries subsidies.  He wrote that the program is already too large.  "[T]he Commission created a subsidy so large that it cannot be funded without levying added charges ... on consumers.  In retrospect, the Commission may not have made a wise choice.  Since available statistics show that about eighty percent of all schools are already wired for Internet service, the Commission could have devised a much;h more modest subsidy program, ..."

Sen. Conrad Burns Proposal

Sen. Conrad Burns, Chairman of the Communications Subcommittee of the Senate Commerce Committee also quickly weighed in.  He floated a trial balloon on June 3: end universal service support for schools and libraries, and instead redirect the existing 3 percent excise tax on telephone service that has existed since 1914 for that purpose.

"Nothing in the Telecommunications Act suggested that the Universal Service Fund should become a cash cow for Internet access or a vehicle for political campaigns," Burns stated in a press release. "The law explicitly states that this goal should only be accomplished in a way that is economically reasonable. I would argue that excessive line-item charges on consumers' phone bills which put the goals of universal service at risk fail this test miserably."

Sen. Burns represents Montana, which like other rural states, has for many decades benefited from universal service support for high cost telecommunications services in sparsely populated areas.  The FCC's new huge universal service subsidies, with the resulting "taxes" on phone users, and emerging evidence of waste, fraud, and abuse, has the potential to undermine public support for the entire notion of universal service.  This has the "farm team" Senators and Congressmen concerned.  

Also, the "para-Congressional way this whole process has gone on" is another problem, said Matt Raymond, a member of Sen. Burns' staff.  "Trying to remove Congress from the process is what concerns us, and the GAO report underscores that."

Waste, Fraud, and Abuse

Already, a number of likely causes of waste, fraud, or abuse of the Schools and Libraries program have been raised.  Complaints to the FCC have begun to flow in.  Several analysts who have examined the process, such as David Boaz at the CATO Institute and James Glassman at the American Enterprise Institute, have raised concerns.  Also, members of congressional oversight committees, such as Rep. John Dingell (D-MI) and Rep. Billy Tauzin (R-LA) have started to level accusations about the process.

For example, Rep. Dingell recently told FCC Commissioners that:

I recently learned that some innovative libraries around the country are actually becoming Internet Service Providers. They buy T-1 lines at huge discounts and let people in the community dial in from their home computers. Do any of the Commissioners believe that Congress wanted to raise phone bills so that anyone with a home computer could get free Internet access by dialing into their local library? If local communities want to make that service available with their own tax revenues, then more power to them. But I fail to understand why a local phone customer in Anacostia or Harlem or East L.A. should subsidize Internet access for the people of McLean, Scarsdale or Brentwood.  See, Statement at House Commerce Committee Hearing, 3/31/98.

Other criticisms of the Schools and Libraries funding process include the following:

• No bid Contracts.  Neither the FCC Universal Service Order of May 7, 1997, nor any subsequent order, nor the applicable Schools and Libraries Regulations require that schools or libraries go through a competitive bidding process for contracts which are covered by the subsidies.   And in fact, many applicants are resorting to no bid contracts.
• Contracts to Provide Both Covered and Uncovered Items.  The subsidies apply to some items but not others.  Yet, schools and libraries are contracting with companies that provide both covered and uncovered items.  The contractors have an incentive to overprice covered items, and underprice uncovered items.   The only one in a good position to detect this practice is the applicant. But, the applicants also have a financial incentive to go along with these schemes.
• Contracting by Consortia.  Entities that are not entitled to receive subsidies are allowed to join with eligible entities to form consortia which may receive subsidies.  While in theory items going to the entities not entitled to subsidies are not covered, contractors have incentives to overprice items for covered entities, and underprice items for uncovered entities.
• Application Splitting.  Many school districts are submitting not one, but many separate applications for subsidies.  Typically, different personnel in different offices complete the application forms, often without a full understanding of what other applications are being submitted.  This could lead to duplicated subsidies.
• Rushed Process.  The FCC created and put into operation the subsidization process so quickly that many of applicants developed plans and entered into contracts without ordinary financial caution.
• No Congressional Oversight.  The FCC delegated administration of the subsidies to a Schools and Libraries Corporation, which it formed just for this purpose.  This has the effect of removing the program from the federal budgetary process, and from Congressional oversight.
• No Public Inspection.   The formation of the Schools and Libraries Corporation has also provided fund administrators with the claim that they are immune from laws that apply to other government agencies, including the Freedom of Information, Open Meetings, and Advisory Commission Acts, thus depriving watchdog groups, journalists, and others from examining the records or proceedings of the program.
• Lax Scrutiny at the Schools and Libraries Corporation.