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User fees inch up.

States are relying on user fees more and more. State revenue from highway tolls, sewage assessments, park visitor charges and other user fees is up 5 percent over FY 1992. In FY 2011, user fees provided, on average, 17.1 percent of revenues raised directly by states. That's still far less than state tax collections, however, which provided 71.6 percent of annual state revenues that year.

In this era of protracted revenue growth following years of declining tax collections during the Great Recession, user fees have become an attractive trend for funding public services. But they're not a new idea. State and local governments have imposed user fees for admission to parks and recreation facilities for decades. The first modern state turnpike, in fact, was financed by tolls. The Pennsylvania Turnpike opened in 1940, 16 years before the Federal Aid Highway Act authorized--and funded--the federal interstate highway system. The rising importance of user fees raises a number of questions for state policymakers. Proponents of fees argue they allow governments to impose the cost of services on the citizens who want and use them. This prevents general fund tax money from paying for government services that benefit only specific individuals, they argue. Opponents argue that, since fees are the same for everyone, they are regressive--that is, they cost low-income households a greater proportion of their income than higher-income households.

State tax policy can be a complex and often divisive subject, but when fees are included, it becomes even more so. Every source of revenue has its advantages and disadvantages from the perspective of citizens and state government. Finding the proper mix remains an ongoing challenge for state lawmakers.

Is it a Tax or a Fee?

In some cases, there is very little practical difference between a tax and a fee. But legal distinctions between the two are very important because several states require approval by the voters or a legislative supermajority to raise taxes, but not fees.

Some revenue sources--such as sales, income and property taxes, for example--clearly fall into the tax category. Payments for government services, like park entrance fees, sewer charges and highway tolls, clearly fall into the user fee category.

Other revenue sources, such as payments in lieu of taxes, court-imposed fines and sales of state property, are not so easily categorized. Yet courts must make these types of determinations every day.

In general, state courts have focused on the intent and uses of the funds by asking: Are revenues placed in the general fund or in a specific fund designed to cover regulatory or other costs? Is the purpose of the fund to raise revenues for the community or for specific individuals and industries?

When the revenue benefits the community or goes into the general fund, it is often categorized as a tax. Revenues benefitting specific industries often are categorized as fees.

Sources of State-Generated Revenue

                FY 1992    FY 2011

OTHER REVENUE    12.4%      11.3%
USER FEES        12.1%      17.1%
TAXES            75.5%      71.6%

Source: U.S. Census Bureau, Annual Surveys of State and Local
Government Finances

Note: Table made from pie chart.
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Author:Haggerty, Todd
Publication:State Legislatures
Geographic Code:1USA
Date:Mar 1, 2014
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