Telephone tax is exploiting the public trust.

TAXING the Internet to sweep government corruption under the carpet sounds like the next Washington scandal, but some members of Congress seek to do just that. At issue is the Universal Service Fund (USF), a federal technology subsidy that was supposed to ensure affordable telephone service for every American--but has instead facilitated criminal exploitation of the public trust.

Through the USF funding scheme, unaccountable bureaucrats have taxed telephone companies to give away billions of dollars in subsidies to mostly small rural carriers and classroom technology vendors who participate in the Fund's "E-Rate" program. Lacking proper public oversight and accountability, USF has proven to be little more than an easy mark for companies to defraud with the help of crooked and incompetent government officials.

Rural telephone companies have made a killing off USF subsidies, which are more in the category of corporate welfare than consumer welfare. One Texas telephone company reported that more than 95 percent of its revenue came from universal service subsidies, leaving consumer sales to shore up the meager remainder. Another carrier received so much from USF, it paid out an average of $375 in dividend checks to customers (who also happen to own the company), an amount more than they paid for telephone service that year.

'Gold-plating'

The rules governing E-Rate disbursements do nothing to prohibit "gold-plating," or over-procurement of goods and services beyond the needs of recipients. This regulatory loophole, along with the ineptitude of the federal officials supposed to crack down on abuse, has led to rampant waste. The FCC discovered, after reviewing 100 audits of E-Rate recipients in 2004, that a full one-third were non-compliant with government guidelines. Many were suspected of committing serious crimes including bid rigging, false reporting, and other kickback schemes with tech vendors.

On the local level, California weighs in as the largest recipient of USF pork. It rakes in more than $4.5 billion in disbursements, nearly twice as much as any other state. Complementing its massive intake from the public program, California has been home to some of the most notorious abusers of USF, particularly with E-Rate. A 2005 congressional investigation found that program bureaucrats approved a "plainly fraudulent application" for more than $48 million in E-Rate subsidies for the San Francisco Unified School District.

And this winter, a City of Industry E-Rate vendor pleaded guilty to submitting rigged bids to wire Fresno schools, agreeing to pay $400,000 in criminal fines and $1.3 million in restitution. And just last month, federal auditors found that school officials in Southern California misspent more than $2 million in E-Rate funds to purchase personal laptop computers for employees.

The toll from years of unchecked fraud, waste and abuse in USF adds up to an enormous amount of money. More than $48 billion in dubious disbursements have been made through the program, and billions more would be needed to catch up with the reckless rubberstamping of expenditures from universal service bureaucrats.

Eager to bail out USF from a potential fiscal crisis, Congress recently held hearings on the subsidy scheme, but refused to take a hard look at its problems. Rather than hold officials responsible for past misdeeds and overhaul USF, prominent members on both sides of the political aisle proposed taxing broadband providers to conceal the system's troubling issues.

This shocking development should send shivers down the spines of consumers, who will be forced to pay more for Internet access so USF administrators can prop up one of the most corrupt programs in government today. With the United States ranking a dismal 16th for broadband deployment in the world, a new Internet bureaucracy will only inhibit entrepreneurship, and further hamstring our national competitiveness in the global marketplace.

Merits of reform

Rather than support broadband taxes, federal officials should consider the merits of reforming USF, creating incentives to invest and compete in rural communities. New rules should ensure government accountability and safeguard advanced communication services. By facilitating industry innovation, the government's role in telephone connectivity can be drastically reduced, as new affordable technologies like Broadband over Power Lines and Internet telephony (VoIP) make billion-dollar subsidies for wasteful companies unnecessary. If truly needy USF recipients had access to more inexpensive choices like these, USF could disappear with little consequence.

The future of telecommunications policy in America relies on the willingness of legislators to think outside the box and free consumers from government failure and public corruption. As Congress reviews the next steps for USF, they should consider the merits of phasing it out completely.

Vince Vasquez is a policy fellow in technology studies at the Pacific Research Institute, a think-tank based in San Francisco, and author of "Digital Welfare: The Failure of the Universal Service System."