Group Project: Are user fees an untapped or overused revenue source?

Since 1975, many states including Minnesota have relied on user fees and charges to finance a broader array of programs and services. Governments use user fees and charges to pay for all or part of the cost of providing specific services or privileges. We use the two terms interchangeably here.They generally reflect a direct relationship between taxes paid and services received and make consumers more efficient, since they must face the true costs of their consumption decisions (Fisher 2007).

User fees have several advantages. Governments are better able to use market forces to set an economically efficient level of services; they avoid subsidizing services where benefits accrue only to specific individuals; and governments can institute user fees to control consumption. Critics argue that they also have one primary disadvantage: they contribute to a more regressive tax structure. Additionally, related administration and compliance costs may offset any efficiency gains associated with the fee.

Recently, Minnesota has seen an increase in the use of fees and charges to finance government services. From 2003 to 2008, the revenue growth from user fees and charges increased at rates greater than both inflation and population growth [see Chart 2]. Despite this spike, Minnesota ranks 38th in its reliance on revenue from user fees and charges and 30th in per capita fees and charges in 2007 (U.S. Census, 2007). However, Minnesota relies more on user fees and charges to fund post-secondary education than the national average.

We evaluated user fees and charges using criteria including efficiency, equity, sustainability and feasibility. Because user fees create a link between costs and benefits, they will be efficient, as long as the fee is optimally priced. Since only those who pay the fee benefit from access to a good or service, such charges are considered equitable. User fees, however, can be regressive as they do not consider a consumer’s ability to pay. Fees' revenue potential is limited as the “fee-base” is too small to support large revenue increases, reducing its adequacy. Fees may be administratively feasible when exclusion is possible, but it is also costly because someone needs to be present to collect payment. The political feasibility of fees may vary depending on how visible they are to the public. While new fees and charges may be unpopular, user fees are more politically feasible than taxes, because the number of people paying the fee are small relative to the total population.

Minnesota’s low reliance on fees in comparison with other states indicates that we should consider their use for a broader range of services. However, we should be careful not to overly rely on fees and charges if we want to maintain a progressive tax structure. Minnesota’s disproportionate reliance on user fees related to post-secondary education may be particularly harmful, as those who pay the fees may be least able to afford them. Instead, we should consider the expansion of user fees and charges in areas that aren’t as clearly targeted at populations that can't afford those fees.