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Under the Telecommunications Act of 1996, the Universal Service Fund (USF) supports both traditional telephone service and advanced telecommunications services, particularly in rural and other remote regions that otherwise might not be served by telecommunications companies. Since the enactment of the 1996 law, universal access has been financed by a federal tax on interstate and international long-distance calls. However, a recent decline in revenues generated by long-distance service has raised concern about the desirability of that financing mechanism.

This Congressional Budget Office (CBO) paper--prepared at the request of the Senate Budget Committee--examines recent trends in the financing sources that underlie universal service and analyzes options for change. In keeping with CBO's mandate to provide objective, impartial analysis, this report makes no recommendations.

Philip Webre of CBO's Microeconomic and Financial Studies Division prepared the paper under the supervision of Roger Hitchner and David Moore. The paper benefited from comments by Coleman Bazelon, Billy Jack Gregg, Jim Lande, and Paul Vasington. (The assistance of those external reviewers implies no responsibility for the final product, which rests solely with CBO.) Within CBO, Kim Cawley, Bob Dennis, Pete Fontaine, Arlene Holen, Bob Murphy, Sarah Puro, Tom Woodward, Dennis Zimmerman, and Melissa Zimmerman offered helpful suggestions.

Loretta Lettner edited the manuscript, and Christian Spoor proofread it. Angela Z. McCollough prepared drafts of the paper. Maureen Costantino designed the cover and prepared the paper for publication. Lenny Skutnik produced the printed copies, and Annette Kalicki prepared the electronic version for CBO's Web site.

Douglas Holtz-Eakin
Director
March 2005