Back in the 1970s, when property tax revolts such as California's Prop 13 put limits on a primary municipal revenue source, many cities turned to the most available alternatives: user fees and charges, fines and forfeitures. An emerging body of public-finance theory came to their support with the concept of "public choice," which drew on microeconomics to argue that user fees are more efficient and equitable than taxes. The basic idea was that a dollar's worth of additional cost should equal a dollar's worth of utility at the consumer level. Further, much like sin taxes, fines and forfeitures compensated for "social bads" while paying for social goods.
Whether local officials ever opened a book on public-choice theory, many of them went down that path to ramp up their fees, fines and forfeitures in an effort to scrape up some extra bucks to pay the bills. Everything from photocopying of official documents to vehicle licensing to recreation fees was fair game. Fines at local courts were often jacked up, not so much to punish offenders more harshly as to raise more revenue. Where seaborne drug smuggling was intercepted, speedboat confiscations became a municipal revenue source. Toll roads became more commonplace. Public parks and beaches, previously free to users, began charging for access and parking.
Increasingly in recent years, however, activists have been questioning that larger reliance on fees and fines, raising issues of fairness, equity and justice. Local governments are already under growing pressure to reexamine these sources of funding, and they should take heed. In some cases, that could mean moving back in the direction of the way things were done decades ago.
Back then, it was popular to finance local water and sewerage systems primarily with property taxes rather than user charges, on the premise that the property tax could be deducted from income on taxpayers' federal returns. As resistance to rising property taxes has grown, however, that political arrow has been stripped from the local fiscal policy quiver, even where property tax limitations are not controlling. The 2017 federal tax law's capping of the state and local tax deduction has made that approach even less politically viable.
Aside from fines and forfeitures, much of the public-choice model is based on the concept of voluntary transactions — that the users who pay fees and charges are making voluntary choices to consume public services, whether directly by turning on the bathroom faucet or indirectly by hooking onto the sewer system. Those who don't use a given service are not compelled to pay for its enjoyment by others.
In some cases, municipal utilities that had relied on the property tax shifted their revenue sources to user charges. Various water districts began adding a fee for sewerage based on water consumption. The public-choice theory buttressed the popular beliefs of existing residents that improvements benefiting newcomers should be paid through special assessments, not general taxes. Special assessments for local improvements became the order of the day, particularly for growing cities: Irvine, Calif., for example, operated for years without any citywide property tax at all, funding much of its infrastructure primarily through developer fees and special assessment districts for a multitude of facilities, including street and sidewalk lighting and park landscaping.
New technologies may facilitate more user charges. For local roads, gas tax revenues are heading downward as electric and other fuel-efficient vehicles proliferate. That arguably raises a nationwide civic need for "micro-tolls," using new pinpoint cellular location technology, to pay for a community's pavement and road repairs based on miles driven rather than fuel consumed.
Yet the movement toward user charges is not universal. Voters in more than a dozen metropolitan areas have recently elected to fund rail and bus transportation systems with local property and sales taxes rather than user fees. Younger voters in particular are conscious of "negative externalities" — pollution and congestion — that arise from private transportation and ever-expansive highways, coupled with the inability of the transit farebox to pay for operating expenses let alone the heftier capital costs.
In this COVID-19 recession period, local governments are scrambling for every available revenue source, so there is little interest in cutting fees and charges. However, the surfacing issues of social justice, ethics and socioeconomic equity warrant a review of fee policies, fine structures and the fairness of what are called "imposed" fees, as distinguished from voluntary, consumption-based user charges. In Austin, Texas, for example, the local transportation department has determined that certain parking fines were disproportionately harsh on lower-income residents and unduly punitive.
Fiscally, those issues are small potatoes. A bigger-picture financial concern is whether today's user charges are adequate to properly finance the replacement of major municipal infrastructure. Seldom has a municipal user-fee calculation included a full-cost depreciation charge that would prefund the inevitable replacement of obsolete and time-worn structures, water and sewer mains, and other utilities. The challenge in most cases is that utility bills and tax levies are typically calibrated for the repayment of old debt, not the prefunding of future replacements. So the imposition of depreciation-charge fees would require a double-dip in many cases, just at a time when many ratepayers struggling to survive the pandemic recession are worried about keeping their homes and putting food on the table.
As foretold in my 2019 book on public finance, however, readers should not rule out a compromise congressional requirement next year for local depreciation charges on federally funded infrastructure. That policy hook could blunt the newly rediscovered fiscal-responsibility arguments of GOP senators who now want to curb federal budget deficits.
Local elected officials, their professional staffs and fiscal advisers would be wise to give serious thought to all these policy issues on multiple levels. The Government Finance Officers Association's recent report on fees, fines and asset forfeitures is a good place to start. It distinguishes between voluntary and imposed fees and fines, which is a useful place to begin a bottom-up review of local revenue strategy from an ethical perspective.
As with modern physics, there is no proven Theory of Everything to guide municipal revenue policies. At least for now, fiscal pragmatism with a fresh look at social equity and ethics through the prism of long-term sustainability should be the order of the day.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.