User charges and fees
C. Kurt Zorn

One clear thing about user charges and fees is that there is a lack of agreement about what should be included under the rubric “user charges and fees”. At one end of the spectrum, user charges have been associated with market like transactions in the public sector; transactions possessing a link between a special payment paid and a special benefit received. Utilizing this broad definition, user charges can include

fees and charges, rents and royalties, earmarked excise taxes, permits and licenses... revenues from the sale of government property, interest on government loans, premiums collected for disaster or other special insurance, receipts of public enterprises, the revenues raised from government-created property rights, and premiums or annuity payments for government retirement or health programs.3

Another definition for user charges portrays them less broadly as a subset of beneficiary charges. Beneficiary charges are defined as payments made by consumers in “direct exchange for government services received”4 and include user charges and fees, license and permit fees, and special assessments. User charges are defined as payments that can be avoided by not using the service without regard to whether the service possesses public good characteristics. License and permit fees represent payments by consumers for government-produced services (such as inspection and regulation). Special assessments are directly linked to benefits received by property and its owners.

A narrower definition of user charges states they are “prices charged for voluntarily purchased, publicly provided services that, while benefiting specific individuals, are closely associated with pure public goods.”5 This definition excludes revenues raised by local government utilities –including water, sewage, electric, and gas utilities– because utility charges are public prices for publicly provided products that are truly private in nature. Also excluded are license and permit fees –because they are associated with privileges granted by government, not publicly provided goods– and special assessments because they are not voluntary.

This third definition is employed as the definition for user charges and fees in this chapter; it focuses on distinctly public-sector activities that do not compel individuals to contribute. User charges and fees are payments for voluntarily purchased, publicly provided services that benefit specific individuals, but exhibit public-good characteristics or are closely associated with public goods.

Goods that exhibit public-good characteristics or are closely associated with public goods often are referred to as merit goods.

[A] merit good [is] a private good that has some public good characteristics... Part of the benefit is ‘seen' by the individual consumer and part by... the public in general. Although it is possible to levy user charges, total production could be subsidized to the extent that collective benefits are perceived.6

In other words, it is possible to exclude individuals from the consumption of a merit good if they are not willing to pay for the good and the benefits associated with consumption of the good clearly can be linked to an individual or group of individuals. However, there are external benefits associated with the consumption of the good and thus there may be a rationale to subsidize its provision.

The term beneficiary charges is used in this chapter to describe a group of nontax-revenue sources that broader definitions often include under the heading “user charges and fees”: utility revenue, special assessments, and license and permit fees, and user charges and fees as defined above.7

Table 1 helps to clarify the definitions being employed for user charges and fees and beneficiary charges The role that utility charges, user charges and fees, special assessments, and license and permit fees play in the local-government revenue structure is clearly delineated and differences among these local revenue sources are highlighted. Utility charges are, in essence, public prices levied on publicly provided private goods that the public sector has chosen to provide. User charges and fees are public prices that are levied on publicly provided goods that possess public-good characteristics; they create direct or indirect external benefits that may argue for subsidization of the good to ensure efficient levels of provision. Special assessments, despite being linked to identifiable beneficiaries and being associated with public goods, are compulsory, not voluntary. License and permit fees do not purchase a government-provided good or service; they are exchanged for a privilege.

Table 2 lists an assortment of sources of local government beneficiary charges. The sources are categorized as utility charges, user charges and fees, special assessments, and license and permit fees in order to further clarify the distinction among those four nontax-revenue sources. Admittedly, determining what should be placed in each category is somewhat subjective. For example, the distinction between sources of utility charges and sources of user charges hinges on whether the good exhibits public-good characteristics or is closely related to a public good. However, making this determination may involve a degree of normative judgment.

Some goods and services clearly are private goods without public-good characteristics and therefore are sources of utility charges –electric, gas, telephone, and cable television utilities. Water, sewerage, and transportation services are characterized in Table 2 as sources of utility charges, but some would contend that they are more appropriately classified as sources of user charges. The rationale is that these services are almost exclusively provided by the public sector and therefore must be merit goods. An equally strong argument, however, is that these services are not merit goods. Historically water, sewerage, and transportation services were franchised to the private sector and the public sector took over their provision only after rampant abuse of the franchise privilege occurred. If it were not for this historical precedent, it would be possible today to have efficient private sector provision of these services with public regulation.

3 Fred L. Smith, “Prospective and Historic Role of User Charges as an Alternative to Taxation,” Proceedings of the National Tax Association-Tax Institute of America 1981 : 55.
4 Anthony Pascal, A Guide to Installing Equitable Beneficiary-Based Finance in Local Government (Santa Monica, CA: The Rand Corporation, 1984), p. 1.
5 John L. Mikesell, Fiscal Administration (Chicago: The Dorsey Press, 1986), p. 370.
6 Jerome W. Milliman, “Beneficiary Charges-Toward a Unified Theory,” in Selma J. Mushkin, ed., Public Prices for Public Products, (Washington, DC: The Urban Institute, 1972), p. 40.
7 Pascal, Equitable Beneficiary-Based Finance, p. 1. It should be noted that the term beneficiary charges also is ambiguous. See Selma J. Mushkin and Richard M. Bird, “Public Prices: An Overview,” in Selma J. Mushkin, ed., Public Prices for Public Products (Washington, DC: The Urban Institute, 1972), p. 4.