Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.E-mail: email@example.com
Fees offer an attractive option to raising taxes. Are they effective?
What will they think of next? Winter Haven, Florida, is imposing an accident response fee -- for services rendered when police officers and firefighters come to the rescue. Wisconsin is tripling the fee for its elk-hunting license -- even though there aren't enough elk to warrant an elk-hunting season. And the Virginia legislature has given sheriffs the go-ahead to charge jail inmates up to $5 a day -- an increase from a former limit of $1 a day -- for the privilege of being locked up.
These are desperate fiscal times for states and localities. Even the bounty that is the federal stimulus program can't supply enough cash to meet the demand for services. That gap has state and local officials desperately seeking revenue wherever they can find it. Often, that's user fees.
I checked in with four experts in the field to get a better idea of what's happening with fees in this recession and what lies ahead. The experts are Bob Behn, who's a lecturer on the faculty of the Harvard Kennedy School; Ivan Kenneally, an assistant professor of political science at the Rochester Institute of Technology; John McGlennon, chairman of the government department at the College of William and Mary and a county supervisor for James City County in Virginia; and Mike Pagano, dean of urban planning and public affairs at the University of Illinois, Chicago, and a long-time consultant to the National League of Cities on local revenues. Reader alert: The experts don't agree on all points.
The imposition of new fees is fairly typical for a recession. Are state and local officials behaving typically this time around?
John McGlennon: We haven't been as able in this recession to raise or impose fees. Over the past decade, states and localities had already moved aggressively to shift the cost of government away from the general public and toward specific users. In addition, there may not be a lot of room in the current economic environment to raise them much more. Take vehicle registration fees. Car sales are way down, so that won't produce a lot of revenue, and there are concerns that adding to the cost of a new vehicle will hold back any economic resurgence. The go-to solution is already gone.
There are some places, though, where we are going to see some increases. But even there, states are looking at it with mixed emotions. A big example of this is tuition increases. We've seen a lot of people raising concerns about the rapidly increasing cost of education. Public universities are seeing a surge of applications because of the differential in price compared to a private university. With public university tuition rising, it creates a problem in many states.
Why are user fees an attractive tool for revenue raising?
Ivan Kenneally: Ever since the Reagan administration, there's been a general disdain attached to taxes. If you try to raise revenue through taxes, especially high confiscatory taxes, you can't win on either side of the aisle. The rub of it is, it's really hard to raise the money you need now without the mechanism of taxes. But there's not an enormous amount of confidence about how governments raise taxes right now. So states use fees that are usually attached to licensing or a government service.
McGlennon: Fees are politically more palatable for a legislature that's wary of imposing general taxes. The argument that's usually made is that if someone doesn't want to pay the fee, they don't have to request the service. You expect users to pay for services, but a lot of fees do hit the general public, such as driver-license fees and car-registration fees.
How effective are they as a revenue raiser?
Bob Behn: User fees are at the margin. They don't solve the fiscal problems that state and local governments have. States and localities need structural changes in their tax structures.
Mike Pagano: They generate a substantial amount of money for localities. If you look at municipal revenues, the largest own-source revenue is no longer the property tax. Today, 40 percent of own-source revenue comes from fees, 30 percent from property taxes.
Kenneally: Fees are a line item, and a line item isn't effective when you have systemic problems. Raising tolls, for instance, can help a department of transportation, but a state won't crawl out of its deficit hole by raising tolls. That said, a relatively small uptick in a toll can raise a lot of money at a busy toll booth. People won't get upset if a toll is 25 cents higher, and with E-ZPass, they don't even see it.
Are there policy problems with fees?
Pagano: The biggest question for user fees is whether, if you have a service that is fully funded by user fees, there is fairness built into it. User fees are usually flat fees that are not tied to the socio-economics of users. With park and recreation fees, users tend to be lower-income residents -- higher-income people tend to join private golf courses or swimming pools. But the charge for those facilities can have the effect of disallowing people use of the park because of an inability to pay. That's a question that needs to be raised when expanding or attaching a fee.
McGlennon: At times like these, citizens are experiencing a double hit. The level of service may be reduced -- fewer counselors at a rec center camp; parks open fewer hours -- but fees are going up. They feel like they are getting less for more money. Obviously, some families might find themselves unable to meet the costs. So their kids will not be in a supervised recreation program and, if the parents are struggling to keep their jobs, that may mean unsupervised kids at home.
Kenneally: A raise in a fee is not nearly as transparent as an increase in taxes. It's amazing how many fees for government services are out there, but ask someone how much does it cost for some fee, and they won't know. But taxes: They know exactly. They feel taxes in a palpable sense.
Fees can be politically risky, especially for a government that's not delivering the goods -- politically or economically. Spitzer [New York's former governor, Eliot Spitzer] went through a phase just a few months into his governorship when he was very unpopular. He'd lost a lot of his political capital. Even his party turned its back on him. When he raised fees, he was tortured for it. It was open season on him -- and this was before the scandal that drove him from office.
Where are the best places to impose or raise fees?
Pagano: When general tax dollars start to dry up, there's an incentive for local governments to search for those activities for which a user fee can be attached -- a utility or enterprise that can be nearly fully funded by user fees. We can see, if not new ones, an increase in rates -- to the extent there's utilization. But you can hit a ceiling. If there's excess capacity in, say, a parking garage, an increase in the fee can drive people away. But if you have good utilization for services and they are below market price, that's probably where you're going to look.
What's your take on accident response fees? Good idea or bad?
Kenneally: Fees should be inconspicuous, something that can be folded into normal economic activity. The worst kind of fee is when you have to write a special check for something and money is pulled out of your checking account. The problem with an ambulance collection fee is that it couldn't be more conspicuous. It requires a person to write a separate check. It's attached to an inherently important service -- a service governments were created to provide. There is just something so ungenerous in spirit about it. And people might begin to fear that, if they can't pay, they'll be denied an essential human service that everyone is entitled to through their taxes. The states doing this can't not know they are on shaky political ground, so it's an indication of how bad things are economically.
Behn: I go backpacking in the White Mountains of New Hampshire. Every year there is some idiot who goes off without proper gear and needs to be rescued. I'm prepared to pay $2 at trail head for insurance. At the same time, I would argue that the idiots ought to be charged for the helicopters and everything else. This, to me, is reasonable. The trouble is, the hiker fee won't solve New Hampshire's budget problem. From my perspective, the hiker fee should be to deal with the cost and benefit of running the rescue service and perhaps deterring idiots -- not to solve overall budget problems.
What lies ahead?
Pagano: Cities will be looking at fair and equitable ways to make medical and education nonprofits -- 501c3s -- that don't pay property taxes pay fees to cover some of the cost of providing services. One Minnesota city charges a fee by the curb footage in front of your house. It's a way of generating revenue for streets. It applies to everyone, including 501c3s. They are exempt from property and sales tax but not from fees.
Are fees tapped out?
Pagano: Fifteen years ago I predicted that we may be reaching the limits of user fees. Boy, was I wrong.
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