Of Public Interest

Volume 3, Number 15
October 2001

Caught between the desires of constituent groups for larger spending programs and the opposition of taxpayers to higher taxes, governments speak increasingly of user fees as an alternative to taxation. User fees would seem to represent the injection of commercial principles into government. The U. S. Postal Service, after all, is financed with user fees, and it is now treated officially as a commercial entity. What you pay for mail service depends on how many items you mail. If the Postal Service were financed from tax revenues, how many items you mailed would have no effect on how much you paid.

User fees are typically justified as means of placing the cost of government on those who use governmental services. For instance, a city extending sewer lines or streetlights to a new area might finance them by a special charge imposed on the owners of affected property. In such cases as these, it might seem relatively straightforward to charge beneficiaries directly for the services they receive.

User fees have been supported by arguments that they promote both equity and efficiency. Equity is often better served with user fees than with taxation because the amounts that people pay to support a service varies with how much of the service they use. Efficiency is likewise often better served with user fees, because the payment of user fees provides information about whether the service being offered is worthwhile. If user fees can’t cover the cost of a service, that service would seem not to be worthwhile to its users. By contrast, if user fees generate a surplus over cost, that service would seem to be highly worthwhile and perhaps a candidate for expansion.

User fees might thus seem to offer a fiscal panacea for our new century, for their potential to reconcile the opponents of higher taxes with the supporters of increased spending. Who could object to more government spending when those who use the service are those who pay for it? Governments at all levels have been exploring possible options for user fees and charges in place of ordinary tax increases. With tax resistance growing these days, it is readily understandable why governments would look to user fees: they allow governments to raise revenue without appearing to have increased taxes.

We should, of course, be wary of promised panaceas. Such a characterization of user fees may be an imaginative and understandable outcome of the politics of taxing and spending, but it is generally wrong nonetheless. User fees do not represent the replacement of political principles with commercial principles. They are not so much ways of charging beneficiaries for services that they receive, as they are new ways of taxing people.

A good deal of highway construction is financed by taxes on gasoline. In a rough sort of way, how much people pay for highways depends on how much driving they do. To be sure, this is only a rough approximation. Two people may drive the same distance, but one may get better gas mileage and thus pay less tax for the same road usage. Nonetheless, the gas tax that different people pay is generally a reasonably good approximation for how heavily they use public roads.

Governments increasingly are turning to toll roads. A toll road would seem clearly to be a user fee. Consider a new highway that is to be financed exclusively through toll revenues. People who don’t drive on this highway don’t pay for it, anymore than people who don’t send letters don’t pay for postal services. Look, however, at those who do most of their driving on the toll road. They still pay the same gas tax as those who make no use of toll roads.

If the user fee truly represented a turn to commercial principles within government, those who made heavy use of toll roads would pay less in gas tax. They don’t, of course, and the toll is but a tax in disguise. The toll is simply a new tax that is imposed on those who use the toll road. What holds for the toll road holds for user fees in general: user fees are a disguised form of taxation.

To be sure, the U. S. Supreme Court, in its 1989 ruling in Skinner vs. Mid-America Pipeline Co. (490 U.S. 212), asserted that user fees were not a disguised form of taxation. The Court held that whether something was a tax or a fee was up to the legislature to determine, and once it had done so the matter was settled. A user fee is thus anything a legislature chooses to call a user fee. This may be so as a reflection of political reality. After all, governments are always looking for more revenues, and seek always to give a friendly portrayal to their efforts. To call something a user fee and not a tax sounds softer and more polite. We should remember, however, that only the name has been changed to masque the reality.

A Publication of:
Public Interest Institute at Iowa Wesleyan College
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Mt. Pleasant, Iowa 52641-1328
Phone: 319-385-3462 Fax: 319-385-3799
E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org