Key Takeaways

Contents

Key Takeaways. 1

Introduction. 2

The Broadband World Has Changed. 3

USF Reform Is Inevitable. 3

THE ACP Should Become the Premier Federal Broadband Program.. 4

BEAD Replaces High-Cost and Other Rural Subsidy Programs. 5

Other Rural Broadband Programs Are Duplicative and Ineffective. 5

NGSO Satellites Can Serve Very Remote Areas. 7

Lifeline Is Now Redundant. 7

The Numbers and Practical Steps. 8

Subsidies Alone Will Not Close the Entire Digital Divide. 9

Conclusion. 10

Endnotes. 11

Introduction

The federal government spends a lot of money on broadband. To some extent, this makes sense: Broadband is now a necessity for participation in the economy and society and a means of doing everything from accessing health care to chatting with distant loved ones.

With so much at stake, it is more important than ever to ensure that broadband funding helps those who need it, and the right programs are sustainable. As things now stand, federal broadband programs are dangerously out of balance. Congress has created some relatively effective subsidy programs that render older programs duplicative and wasteful. Yet, the old programs persist, siphoning funding away from more effective ones and increasing phone bills. In particular, the Broadband Equity, Access, and Deployment (BEAD) program will finish deploying broadband to rural areas, so the Universal Service Fund’s (USF’s) High-Cost program and the Department of Agriculture’s recurring ReConnect program are redundant. The Affordable Connectivity Program (ACP), an expanded version of the USF equivalent Lifeline, is running out of money. And the USF funding mechanisms—a tax on consumers of telecommunications services—is distortive.

Congress should do the following:

1. Discontinue the High-Cost, Lifeline, ReConnect, and all other (nontribal) federal programs targeting broadband deployment or individual broadband affordability.

2. Appropriate funding equivalent to those programs’ average annual spending to sustain the ACP.

3. Modify the size of and eligibility for the ACP benefit to make up for any remaining shortfall.

The Broadband World Has Changed

Over the last decade, the United States has made great strides toward universal broadband deployment and the societal benefits that come with it.[1] U.S. broadband ranks among the best in the world for deployment and speed at relatively affordable prices.[2]

Private investment by for-profit broadband providers has driven these developments, but federal broadband subsidies have played their part, especially in helping defray the high costs of reaching rural areas. Nevertheless, some rural areas are still on the wrong side of the digital divide. The Information Technology and Innovation Foundation (ITIF) has long argued that a “large, one-time injection of federal capital … to succeed in bridging the rural broadband divide” should also serve as a “transition away from the FCC’s Universal Service Fund.”[3] In 2021, Congress did the first part when it funded BEAD as part of the Infrastructure Investment and Jobs Act (IIJA).[4] BEAD is a $42.45 billion program with the explicit mandate to provide broadband access to all American households.[5]

Another major category of federal broadband subsidies targets low-income Americans with help paying for service. Congress also expanded this type of subsidy in the IIJA with the ACP.[6]

These three developments (expansive progress in broadband deployment, BEAD, and the ACP) have radically changed the status quo from past decades. It is, therefore, time for radical rethinking and reform of federal broadband subsidy programs.

In short, the ACP has made Lifeline redundant. BEAD will make High-Cost programs futile. Therefore, policymakers should preserve and strengthen the ACP and pay for it by abolishing the Federal Communications Commission’s (FCC’s) High Cost and Lifeline programs and other federal programs such as ReConnect. BEAD is the large, one-time injection that can break this cycle of ineffective spending, so its success should come with the fading away of some of the USF’s largest programs.

USF Reform Is Inevitable

USF reform is no longer optional. With the 30 percent “contribution factor” (effectively the tax rate on Americans’ phone bills) placing a much larger burden on consumers of all income levels than in the past, something must give.[7] Clearly recognizing the ineffectiveness of the past and the promise of legislatively appropriated funds will lead to a future of greater connectivity for less money.

Other proposals to expand the base of USF contributions to include broadband service or online content would simply reshuffle the same bad scheme: They would change how the check is written, but they would not alleviate the total burden on consumers.[8] Broadband subsidies are a policy choice that should be adopted and funded by Congress in the same way other federal priorities are.

Transitioning from the USF contribution factor to general appropriation would also fix the regressive nature of the current system. Today, USF fees are levied on telecommunications services at a flat rate. This structure is markedly different from the broad progressive tax system that funds other federal programs. Indeed, insofar as reform proposals seek to “broaden the base” of broadband subsidy funding, broadening it to all taxpayers is the best base of all.

THE ACP Should Become the Premier Federal Broadband Program

The best subsidies provide direct, flexible support to individuals who need it. The ACP does just that by giving qualifying households up to $30 per month for broadband service and one-time $100 support for buying a broadband-capable device. The ACP also gives consumers a choice to use that money for either fixed or mobile service so that they can pick the connectivity that works best for them.

The ACP is, therefore, exactly the sort of broadband program that can alleviate affordability barriers to broadband access. But the program is running out of money. The original $17 billion appropriated in 2021 is likely to run dry sometime in 2024.[9] Even coming close to a lapse in funding will permanently hamstring the program, since broadband providers will have to notify recipients and ramp down their service. This will break the trust that is an essential component in keeping individuals connected; losing their broadband funding will likely make Americans feel cheated and suspicious of the program even if it eventually restarts.[10]

Beyond this breach of trust, a lapse in ACP-funded plans is unlikely to go perfectly smoothly, and the consequences of errors would fall on the most financially vulnerable. Many households have signed up for the free or cheap plans provided through the ACP precisely because they cannot afford a full-cost plan on their own. If the ACP is pulled back, some of those households may be accidentally left on an Internet plan in the ensuing confusion or not be adequately informed of the rollback in time to cancel their plan.[11] These are financially vulnerable households whose finances or credit scores could be harmed if they suddenly face a bill for even a month or two of unsubsidized broadband use. If generating awareness of subsidy programs has been a challenge, getting the word out about their end should be at least equally as hard—and it would be inexcusable for the ACP to leave any households worse off than they were to begin with because of administrative snafus.

Finally, subsidy programs do not operate in a vacuum. The Capital Projects Fund established in the American Rescue Plan Act puts much of the $10 billion into broadband buildouts that explicitly hinges on those projects being tied to the ACP.[12] More than $42 billion in BEAD funding is indirectly tied to the ACP through the mandate that an affordable low-cost option be provided with new builds.[13] These many billions of dollars are already slated for disbursement and effectively have been “spent,” and the success of the programs they fund will be undermined by interruptions in the low-cost program to which they're tied. All this means any interruption to ACP funding—even just a temporary one—carries enormous risk.

By one estimate, the ACP needs $6 billion per year to continue.[14] It is possible and necessary for Congress to find $5 billion to $6 billion by restructuring current subsidy programs administered through the USF and directly by executive branch agencies. This quest should be a primary goal for policymakers interested in closing the digital divide.

As we will see, the bulk of this funding can come from cutting other redundant or futile programs without increasing financial burdens on Americans. It may also be necessary, however, to fine-tune the ACP to maximize its efficiency. For example, the ACP’s general goal should be to give necessary assistance to low-income individuals, but more research is needed to determine its current effectiveness and how it could be better targeted without creating administrative barriers to access.

BEAD Replaces High-Cost and Other Rural Subsidy Programs

The central challenge of closing the rural-urban digital divide is the economic fact that the up-front expense of deploying broadband infrastructure is often too high to justify serving areas with a smaller number of potential broadband subscribers. Therefore, if policymakers are inclined to ensure these areas get service anyway, government subsidies are necessary. But up-front costs only need to be paid once: These capital expenditures (CAPEX) are distinct from operating expenditures (OPEX) that are associated with the cost of an Internet service provider (ISP) running its network (e.g., customer service, maintenance, billing, etc.).

Given a policy goal of universal connectivity with traditional broadband technologies, there is a case for subsidizing CAPEX: If we can pay to get moderately high-cost rural areas over the hump of up-front costs, then they—and the rest of society—can get the benefits of their being online, which can (eventually) exceed the cost of the subsidy itself.

The same is not true for OPEX subsidies. A network that can never become self-sufficient will perpetually benefit the areas that receive the subsidy, but only at the perpetual expense of everyone else. Everyone is free to live where they like, but it is less clear that their fellow citizens should have to subsidize that decision.

Luckily, BEAD is poised to take the right approach by funding CAPEX, as necessary, to reach most Americans, with the remainder being able to access improved satellite broadband. BEAD will invest $42.45 billion, with deployment to all Americans as its first priority (although, as we argue, the priority should be deployment to most Americans, with satellite service for the remaining truly high-cost households).

Other Rural Broadband Programs Are Duplicative and Ineffective

Compare BEAD’s scope and resources with other federal programs targeted at providing broadband in rural areas. Most notably, the FCC’s programs under the High-Cost fund routinely spend upwards of $4.5 billion per year, with no end in sight. The goal of rural broadband subsidies should be to eliminate their necessity. In that sense, the longevity of High-Cost programs is evidence of their failure.

But broadband deployment programs are not limited to the FCC. In May 2023, nine agencies reported to the National Telecommunications and Information Administration (NTIA) how much broadband funding they paid out in FY 2021, totaling $6.7 billion spent through 37 programs.[15] Thirteen agencies provided data on broadband-related funding for FY 2021.[16] Of those programs, only 10 provided data on the number of subscriptions generated by funding, when such data should be the crux of an effectively designed, successful broadband program.

In a 2022 report, the U.S. Government Accountability Office (GAO) deemed U.S. federal broadband efforts “fragmented and overlapping,” pointing at six programs designed exclusively for deployment.[17] GAO further remarked that at least 133 funding programs under 15 agencies have broadband as at least one of many potential uses, or could be used to support broadband access in some way.[18]

These programs are not necessarily always duplicative, but aligning and streamlining programs would enable more collaboration, better tracking of subscriptions generated, and more people to be served at less cost. [19]

The price tag for broadband deployment subsidies has added up faster than their successes. Various programs under the High-Cost program alone have spent many billions of dollars on deployment, sometimes on “over-building” (building a network in places that already have broadband service). The Rural Digital Opportunity Fund provides financial support to connect rural locations and has upwards of $6 billion in total funding obligated to be paid out through the next decade.[20] The Connect America Fund, which supports the deployment of voice and broadband services in unserved areas, has $1.2 billion obligated in funding from 2019 through 2029.[21] The Alternative Connect America Cost Model (ACAM) provides funding to ISPs that meet particular rural buildout requirements and has spent $4 billion since 2017.[22] Its newer model, ACAM II, has spent $2 billion since 2019.[23] Because some of ACAM’s defined buildout requirements are slower than BEAD’s definition of “fully served,” eligible locations could end up being successfully funded for deployment only to remain underserved under BEAD.[24]

In addition, the U.S. Department of Agriculture (USDA) offers its own suite of programs. Chief among them is the ReConnect Program, which offers both loans and grants for eligible rural deployment and has invested $3.9 billion overall.[25] But at times the spending has been upwards of $300,000 per household.[26] The Community Connect Grant Program provides assistance to providers offering service to economically vulnerable, unserved areas and has a total of $97 million obligated in funding.[27] Of that, $17.5 million was spent in FY 2021.[28]

If High-Cost and the other deployment programs were going to get rural America over the up-front-cost hump, they would have done so by now. A 2017 FCC paper found that we could connect 98 percent of locations to fiber broadband for $40 billion.[29] Yet, we have now spent at least that much through various federal programs and still find the need for more funding. In fact, $44 billion in federal money was invested in broadband from 2015 to 2020 alone, and there are still wide, unaddressed gaps in broadband deployment.[30]

Rather than pouring more of the same into the old, never-finished deployment programs, BEAD will drop the equivalent of 10 years of High-Cost spending all at once, leaving no excuse not to reach all areas that can reasonably be reached with CAPEX subsidies. Therefore, the High-Cost program is now obsolete, so Congress should bring the program’s funding into the Treasury, eliminate it, and appropriate the approximate yearly spending to fund the ACP.

Funding the ACP instead of the High-Cost and other deployment programs is not an abandonment of rural broadband. Indeed, the ACP will complement BEAD’s efforts to deploy broadband infrastructure. Guaranteed availability of subscribers enhances the incentive for providers to pursue them and will encourage more competition for BEAD funds, which will likely lower the total cost of serving all areas.

NGSO Satellites Can Serve Very Remote Areas

There will always be certain areas for which CAPEX subsidies to sustain or deploy wireline or even fixed-wireless networks are too expensive. And yet the federal government appears willing to provide funding for networks in these areas, sometimes at the cost of hundreds of thousands of dollars per location.[31] This is fiscally irresponsible. While these areas should not be left out of the quest for universal broadband, the previously mentioned programs’ commitment to fiber to the premises at such great costs should not continue.

The advent of non-geostationary orbit (NGSO) satellites will make broadband available to even the most remote parts of the United States, with comparable speed and latency to terrestrial technologies. NGSO constellations alleviate the high latency associated with geostationary satellite broadband, and they can provide speed and latency comparable to many terrestrial technologies.[32] Today, these services are characterized by somewhat high up-front equipment costs and high monthly fees, but even combined, these costs are far lower than the subsidies necessary to connect such areas to traditional terrestrial service. Indeed, for the same price as fiber deployment in some rural areas, the government could give a household NGSO equipment and fund the monthly service for decades.

BEAD implicitly recognizes this fact and NTIA will relent in its preferencing of fiber for “extremely high-cost areas.” States have the option of setting this threshold themselves, and they should be solicitous of nonfiber technologies whenever the alternatives are cheaper than fiber for a comparable user experience. Under no circumstances should a program pay more than $15,000 per household. Any location above that threshold would certainly be better served by satellite. Not only will this ensure that BEAD is able to achieve its mission of deploying broadband to all Americans; it will also preserve funding for adoption efforts, which are the next step in fully closing the digital divide.

Lifeline Is Now Redundant

The Lifeline program is targeted at low-income people and provides up to a $9.25 discount on broadband service for most Americans.[33] This benefit is less than a third of that available to households through the ACP and applies to consumers with an income at or below 135 percent of the federal poverty line. Thus, compared with the ACP, Lifeline provides a smaller benefit to fewer people. Moreover, eligibility for Lifeline is one of the ways to qualify for the ACP. In other words, there is no one covered by Lifeline who could not get the ACP.

Once the ACP is sustainable, therefore, Lifeline becomes redundant—and its nearly $1 billion budget could be better used to fund the ACP without reducing anyone’s benefits. Even if Congress were to adjust the size of the ACP benefit (e.g., from $30 to $20 per month) or eligibility metrics (e.g., from 200 to 150 percent of the federal poverty level), it could still provide more money to more people than Lifeline currently does. Maintaining both Lifeline and the ACP would be fiscally irresponsible; letting the ACP run dry while Lifeline continues would be nonsensical.

The Numbers and Practical Steps

To get specific about how USF reform can sustain the ACP, table 1 gives average expenditures for Lifeline, High-Cost, and ReConnect alone.

Table 1: Annual and average spending on Lifeline and High-Cost USF and USDA’s ReConnect programs[34]

* Mean.
** Median.

Congress has already appropriated funding for BEAD, so no additional funding is needed to eliminate the rural-urban digital divide in all instances where funding can reasonably solve the problem. Therefore, elimination of the High Cost, Lifeline, and ReConnect programs would reduce the burden on American consumers by approximately the amount needed to fund the ACP. (See figure 1.)

Again, this plan ensures funding for rural America through the already appropriated BEAD program funds, which render the High-Cost and USDA programs obsolete. And, while it abolishes Lifeline, it replaces it with a larger benefit to all the same households. Together, this gives us $6.43 billion for the ACP by changing the structure of the funding, not by collecting any more money. This is a conservative figure, since Congress could net more savings if it were to eliminate other duplicative or obsolete broadband programs elsewhere in the federal government.

Figure 1: ITIF proposal to sustain affordable connectivity by ending obsolete broadband programs

Of course, structural reforms to the USF will face practical challenges given that USF programs currently operate outside the normal appropriations process. But Congress could potentially move USAC and other broadband funding programs to under the authority of the Treasury Department. Then it could simultaneously eliminate any future appropriations for the obsolete programs and appropriate the same amount to fund the ACP. This move would also obviate recent challenges to USAC’s constitutionality by making clear that Congress controls taxing and spending.[37] Whatever one’s views of the legality of USAC’s role in USF programs, it surely does not have a private property interest in USF funds, so Congress could order the funds under FCC/USAC control to instead be deposited in the Treasury and no longer be spent on additional High-Cost or Lifeline programs.

This plan would remove the tax burden on telecommunications consumers, who would all see cheaper phone bills. While new appropriations would be necessary, the actual financial burden on American taxpayers would, at worst, remain unchanged, and could decrease depending on program participation.

Subsidies Alone Will Not Close the Entire Digital Divide

The offline population has become one defined more by not having an Internet subscription (lack of access) than by physical distance from the technology itself (lack of availability). Only 3.9 percent of offline respondents to NTIA’s Internet Use Survey cited lack of available broadband networks as the reason behind their lack of subscription, and BEAD funding should provide the influx of funds necessary to close all remaining gaps.[38] Contrast this with the most common reasons for nonadoption—57.5 percent of households, for example, cite lack of interest as the prime deterrent, and another 18.1 percent report that the price of a subscription is too high—and it becomes clear that nonadoption is the next major hurdle in digital inclusion.

Accompanying this change has been a widespread and justifiable shift in broadband priorities. Many programs promoting broadband access now do so through the lens of pushing adoption, whether through affordability programs such as the ACP or other efforts to advance digital inclusion. In fact, in FY 2021, NTIA found that 76 percent of broadband funding was paid out to digital inclusion and adoption efforts rather than network deployment.[39]  

If its funding is secured and made sustainable, the ACP is the best policy tool available to defray the cost of Internet subscriptions and connected devices. Once this relatively low-hanging policy fruit has been picked, broadband policy is not finished. Remaining offline groups will require different kinds of help to achieve full digital inclusion.[40]

Digital inclusion covers a wide range of approaches geared toward removing barriers that keep people offline. One major strategy is to advance digital literacy by better training people on how to use the Internet, including how to navigate across common applications, stay safe online, and generally use the Internet effectively.[41] The gold standard for providing digital literacy training and other digital assistance is digital navigators, which are trusted local individuals or groups serving as points of contact in the process of getting online.[42]

As BEAD and the ACP close availability and price gaps, programs targeting other barriers increase in relative importance. Forward-looking policymakers should seek to facilitate digital inclusion efforts that now suffer from many problems such as lack of scale, insufficient or unreliable funding, and a dearth of accurate, comprehensive data.[43]

Rather than waffling over whether to fund a vetted and successful subsidy program, at the highest levels, the government should be focusing on providing large-scale funding and widespread, accurate data to assist in other digital inclusion efforts. Public energy and time in this space would be much better served fine-tuning and scaling digital inclusion efforts than being obligated to lobby for a program whose continuation should be a no-brainer.

Conclusion

BEAD and ACP are the right policies to move toward closure of the digital divide. But the ACP is running dry and, without Congressional action, people who rely on it will be left unconnected and the complementary benefits it would have offered to BEAD will be squandered. But Congress can make the ACP sustainable without the need to tax Americans more. Precisely because BEAD and ACP are so transformative, old broadband subsidy programs are now duplicative and obsolete. By moving old funding to the ACP, Congress can set broadband policy on a more successful and responsible track.

Endnotes