User charges and fees (1 - Introduction)
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User
charges and fees
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1. Introduction
Local governments traditionally have relied heavily on the property tax as a source of revenue. During the past two decades local governments have substantially diversified their revenue structures, thereby reducing the importance of the property tax in the local revenue structure. A number of factors have contributed to the diminution in the role of the property tax in local government fiscal structures. First, the late 1970s and early 1980s were an era of tax limitations, as taxpayers expressed their unhappiness with rising taxes. The effects of the tax revolt were widespread and with the property tax being the most prominent of local taxes focused on limiting property tax increases. Second, federal aid to local governments grew during the 1970s, becoming a larger contributor to total general revenue for local governments.1 Third, local governments were suffering varying degrees of fiscal crisis due to recessions, losses of tax bases to suburban and regional competitors, and changing state and federal policies. As a result, local governments were looking for ways to diversify their revenue structures in order to stabilize revenues and enhance revenue streams without raising taxes. Faced with these pressures to reduce reliance on the property tax and to increase their own source revenues, local governments expanded the use of other sources of revenue. One source that gained importance in local governments' revenue stream was broad-based taxes. In 1987, local government nonproperty tax revenues accounted for 8.8 percent of total revenue, 10.1 percent of own source total revenue, and 26.3 percent of total tax revenue as compared to 6.1 percent of total revenue, 9.7 percent of own source revenue, and 14.9 percent of total tax revenue in 1970.2 Nontax-revenue sources also began to play a more prominent role. Charges, miscellaneous revenue, utility revenue, and liquor-store revenue accounted for 41.8 percent of total local government revenue and 62.6 percent of own-source revenue in 1987, up markedly from 22.0 percent of total revenue and 29.5 percent of own-source revenue in 1970. Acknowledging the growing role of nontax revenues in local government finance, this chapter provides a detailed look at one component of these revenues, specifically user charges and fees, and analyzes their role in local government finance. Because of the ambiguity in what constitutes user charges and fees, the first section is devoted to a discussion of the range of definitions used for user charges and fees and delineates the definition employed in this chapter. Recent trends in local governments' dependence on user charges are discussed in the next section. In the third section, the basic rationale behind definitions of and distinctions between user charges and fees is presented, including basic theory, advantages and disadvantages associated with their use, and pricing considerations. Guidelines for implementing user charges and fees are presented in the next section, along with an example of implementation by a local government. The final section provides a brief summary. 1 The 1980s, however, saw a reduction in federal aid to local governments as the federal government phased out its general revenue-sharing program and made cuts in domestic programs in response to Gramm-Rudman-Hollings constraints. |
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