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The Risks of Relying on User Fees

In the past three years, states and cities have brought in billions of dollars in additional user fees. But there are pitfalls to this form of revenue boost.

The political debate that pits the desire to generate new revenues against the drive to cut costs has become a central part of discourse at all levels of government. We’re not going to weigh in here on the merits of the two approaches. We think some combination makes sense for most governments, and we’ll leave the rest of the argument to the people who measure their success at the ballot box.

But one thing is uncontestable. In managing a state or locality, it’s never easy to raise taxes. Nobody wants to pay more taxes. Really. We sure don’t. And the people who say they do are often the people with so much money that they can spare it. (Sorry, Mr. Buffett.)

Read the April issue of Governing magazine.

No wonder, then, so many state and local governments have turned to an alternative that brings in money like a tax but isn’t a tax. We’re talking about user fees.

For years, we thought of fees as the province of extra special amenities, like municipal golf courses or tennis courts. But these days, the range of activities to which they’re applied is huge. Easton, Pa., for example, has construction code building fees, plumbing inspection fees, permit fees for moving a household, fees for zoning hearings for a variance, fees for pushcart vendors’ licenses, and so on. Some places are even charging fees for various kinds of fire service.

“Politicians who won’t cut spending to meet a revenue shortfall are always looking for ways to pluck more feathers from the goose,” says Lawrence Reed, president of the Foundation for Economic Education. “They can sometimes get them with less squawking through a quiet hike in user fees.”

In the past three years, states alone brought in some $1.5 billion in additional user fees, according to the National Association of State Budget Officers. Of course, the numbers vary from state to state. Georgia, at an extreme, raised its fees by a remarkable $264 million for fiscal 2013.

As for cities, a long-term trend is clear: Two in 5 city officers reported that their entity raised fees in 2011. The National League of Cities also found that the assessing of or raising of fees has been going on for much of the last two decades -- in good times and bad.

Supporters of such fees argue, sensibly, that they can help acquaint taxpayers with an important reality: The idea that services actually cost something, and that they don’t drop from the heavens like Old Testament manna on hungry Israelites.

So have states and cities discovered the proverbial free lunch? Not really. And it’s probably beneficial for managers who are considering this route to take into account some of the pitfalls.

For one thing, there’s the question of their potentially regressive nature: “The rationales for having user fees,” says Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, “is the benefits principle.” He’s talking about the idea that he who benefits should pay. But, as Gardner explains, “that principle runs head on into the ability-to-pay principle. Low-income families don’t have the same ability to pay. The $20 you use to register your car is going to be a much bigger deal for a family below the poverty line.” Of course, this can be ameliorated with means testing.

Then there are legal principles dictating that user fees be used for the service provided -- not just dumped into the general fund. The National Conference of State Legislatures warned about this more than a decade ago when it stated, “If user charges exceed the cost of providing services, or if separate accounting is not used, governments are vulnerable to court rulings that such charges are taxes.”

In 2010, for example, the Oklahoma state Supreme Court struck down court fees as unconstitutional because the state was using them to support non-court related activities.

From a simple fiscal point of view, there’s a nearly inexorable pressure for the cost of services to go up each year. Does that mean that states and cities that rely on fees are going to have to continue pushing them upward periodically? That’s certainly a problem. “Politically, the long-term difficulty is encapsulated in the idea that when I get paid the same $20 next year, it won’t buy the same amount of public service,” says Gardner. “They are, by definition, a nongrowing revenue source.”

Taking all this into account, does that mean there’s a likelihood of a backlash against more user fees. particularly as fees take cash out of the pockets of a growing number of citizens? That’s our bet.

A little evidence: Back in August, California residents passed Proposition 26. It mandated that any new user fees require a two-thirds vote of the legislature. And as California history teaches us, those supermajority requirements can be a giant red stop sign to change. Says Tim Eyman, a conservative political activist, “Prop 26 was a good canary in the coal mine message: If you guys abuse your authority and say we’re going to call it a fee but it is a really a tax … that will obviously provoke a citizen response.”

Brian Peteritas is a GOVERNING contributor.
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