The purpose of this memorandum is to provide information on fees, their proper use, and the methods for calculating them. As with most public policy issues, the desirability of user fees hinges on two questions: do they increase or decrease economic efficiency, by leading to either a more or less desirable use of public resources, and do they promote fairness.
Everyone pays taxes, but only the users of a publicly provided service pay user fees. So when the users are only a small segment of the taxpaying population, it may be more fair to make that small minority pay for the service through their fees than have the majority pay for something they derive no benefit from. Taxes support general government functions such as public streets and public safety for which individual beneficiaries cannot be identified. Rather these services benefit the community as a whole.
Local governments may face special circumstances where a fee or charge has to be used when a tax would have been more appropriate. These special circumstances are generally related to some sort of artificial tax limit. With rising costs and property tax limits, local governments across Wisconsin are struggling to maintain existing programs.
We generally distinguish fees from charges although many people use the terms interchangeably. In this report, we will distinguish between user fees, charges and regulatory fees. Under standard guidelines, user fees and charges are defined as voluntary payments (“voluntary” in the sense that they are paid only to the extent the individual chooses to use the service) that are used to finance traditional governmental services such as water, sewerage, and mass transit (charge); recreational activities such as golf and swimming (fees); and miscellaneous programs such as animal shelters (fees), continuing education programs (fees), and dangerous tree removal (regulatory fees). These charges are for a particular benefit that an individual receives. The purpose of the fee is to recover all or part of the cost of providing the service. To the extent that the government charges the full cost of the service, it is trying to imitate the private market.
Another way to define user fees is that they must exhibit the following three characteristics: separability, voluntarism, and chargeability. A fee to use a pool fulfills these three criteria. The use of the pool can be separated out from other city services. It is easy to identify users of the pool – anyone who shows up to swim! The activity of swimming is completely voluntary. It is very easy to collect the fee at the entrance to the pool. The costs of running a pool can be clearly calculated; therefore it is not difficult to determine the fee that needs to be charged to cover the cost of maintaining and operating the pool.
The use of charges for traditional governmental services such as water and sewerage are separable and chargeable, but are not necessarily voluntary. The amount of water and sewerage tends to related to the uses of needed family activities, such as, bathing, cooking and toilets. These water and sewerage services are provided to almost everyone in the city and would be considered for a tax on this basis, but the charge prevents against the “free-rider” problem of some people over using a service while others must pay for it. Here “voluntary” is used in the sense that they pay only to the extent the individual chooses to use the service and is not considered completely voluntary like swimming.
A regulatory fee, on the other hand, is imposed as a result of a need to regulate activities for the public good, typically for public health, safety, or other protective purposes. Fees purchase a privilege or authorization that applies only to those individuals who want to engage in an activity deemed to have a significant impact on the health and well-being of the community as a whole. Regulatory fees are applied to such activities as restaurant inspections, landfill use, building permits, dog licenses, and marriage licenses. While the individual who pays the fee does not necessarily benefit personally from the service provided, the public does benefit. Furthermore, since a regulatory fee is not necessarily related to the cost of providing the service, this kind of fee does not try to approximate the private market.
Wednesday, January 13, 2010
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