What the federal government gives back, the states take away Fees put a crimp on tax cuts by Christopher Boyd

from NewsLink, Vol. 8, No. 1, Fall 2003 It’s not the greatest time to be a governor. Gone are the days of bulging state surpluses and low unemployment rates. Today, states are muddling through the most severe fiscal crisis in more than a decade. And there’s not much help coming around. And while it saw the largest expansion in a quarter since 1984, the nation is in the throes of a “jobless recovery.” Unemployment hovers at 6.1 percent. Consumer confidence is lackluster. The federal deficit is at near record levels. The trade deficit registers 5% of Gross Domestic Product (GDP). The focus on Capitol Hill is not on more spending for the states but on the rebuilding of Iraq, with Congress earmarking $87 billion to rebuild the country. Unlike the President and Congress, the overwhelming majority of state and local governments must balance their budgets. Thus, a governor is left to make tough choices. As a result, many state and local governments have raised taxes, cut services, postponed capital spending, raised fees or undertaken a combination of these and other measures. Playing corporate down-sizer or hiking broad-based taxes is not the way to endear oneself to angry voters. Raising taxes is clearly unpopular; just ask recently recalled California Governor Gray Davis. Recently, voters in both Alabama and Seattle turned back referenda to raise taxes. In politically progressive Massachusetts, voters last year almost voted to abolish the state income tax, the largest source of the state’s revenue. That leaves elected officials with few options. Some of these options are adeptly creative. And nothing less than a good portion of your tax cut is at stake. Turning to fees The instruments of choice are “user fees” which are distinguished from broad-based taxes and are discriminatory in nature. User fees are an attempt to impose some market-like prices for goods and services provided by state and local governments.(1) Despite their name, gasoline taxes, for example, are effective user fees. The use of roads by motorists roughly corresponds to the amount of gasoline they consume. Most revenue from gasoline taxes is earmarked for road maintenance and construction. Therefore, people who buy more gasoline contribute more to the provision of roads, traffic lights and stop signs. Likewise, individuals who pay hunting and fishing licensing fees, pay for conservation of lands used for hunting and fishing. Ideally, these fees cover the costs of maintaining the reservations and lakes. But governors and state legislatures are moving beyond the use of fees as a “pricing mechanism” and toward a more confiscatory approach. A 2003 study by the National Conference of State Legislatures (NCSL) found that after sales taxes, fees generated the most revenue for states. To date, with only 42 states reporting, 30 have raised more than 200 different fees for a total fee increase of nearly $2.6 billion. Compare that to 2002 when 16 out of 50 states raised fees for a total of $926 million. That makes the amount of the fee increases in 2003 nearly three times greater than that of 2002, which itself was more than twice the $405 million fee increase in 2001. In pursuit of balanced budgets, state and local governments have been especially creative when it comes to the many categories of services supported by fees. Now it seems their past creativity has finally paid off. Common targets for fee increases include motor vehicle and drivers’ licenses, court fees, filing fees, health care fees and hunting, fishing and park fees. Less common ones include North Carolina’s fee increase levied upon local health departments for processing pap smears. Massachusetts has also raised fees on everything from ice time at skating rinks to bar exam fees paid by new law school graduates.(2) In total Massachusetts imposed, increased or established 28 fees. Thanks to this creative financing scheme, you’ll pay a $25 surcharge if you’re caught speeding and a $100 instead of $25 fee to register your firearm. Even getting married will cost more in the Commonwealth. The fee to set you on the road to marital bliss has increased more than 10-fold from $4 to $50.(3). According to the NCSL, Massachusetts has earned itself yet another dubious distinction by imposing more fee hikes than any other state in the nation this year. Of the 30 states that raised fees this year, only nine are bringing in $100 million or more in fee increases. Massachusetts leads the pack reporting $501.5 million in fee increases; New York follows with $367 million in fee increases.(4) A basic question The rush to raise fees prods a fundamental question: Are raising fees and raising taxes the same thing? As levied in Massachusetts, is a fee really a tax? Merriam-Webster’s dictionary defines fees as a sum paid or charged for a service. When someone chooses to use a government service, that person should be expected to pay for it. Therefore, they should pay a fee. This “user” fee should cover the cost of the service that the person is receiving. If a person chooses to spend an hour skating at a public skating rink, that skater should pay the costs for that hour. If a hunter chooses to hunt in a state forest, that hunter should pay to defray the cost of state oversight of the public land. If a law student is paying a fee to take the bar exam then that fee ought to cover the administrative costs of keeping his record on file. If the money handed over also pays for something that person does not want or isn’t getting then they are paying both a fee and a tax. It is highly unlikely that the unit cost of providing a service has grown proportionately to the level of recent fee increases. The unit cost of filing firearm IDs has not increased by a factor of four. Taxes differ from fees in the sense that paying them isn’t a matter of choice and what you pay for is not directly tied to what you get. In the final analysis, government is no longer providing just a service but is “taxing a choice.” The excess price paid by the consumer of that service flows not to the agency but to the state’s coffers for general expenditures. Governor Mitt Romney makes a distinction between taxes and fees by describing fees as charges that are levied in return for specific services. Since the amount of the fee often covers the cost of a service, the governor has said he views fees as distinct from - and preferable to - broadly applied taxes on income or the sales of goods.(5) This sounds reasonable. But any plan to raise fees or taxes should be met with skepticism until the Commonwealth has exhausted all the opportunities for cutting spending. Where’s the net gain? Which brings us to the next question. As the federal government gives (in the form of tax cuts and rebates) and local government takes away (by way of tax and fee increases) what is the net gain for taxpayers? In May 2003, the Bush administration sought to increase consumer spending by putting more money into the hands of taxpayers through historic tax cuts. With this newfound money in their paychecks or in their mailbox, John and Jane American could go off and make substantial purchases, thereby providing a much needed lift to the struggling American economy. As of this writing, there’s some evidence that this money is sustaining the current economy. However, as a USA Today editorial noted recently, “Some economists project that higher state and local levies will sop up at least half of any economic stimulus provided by the federal tax cut.”(6) Using the median family income estimates for Massachusetts from the U.S. Census Bureau for 2003 the chart nearby shows the tax cut benefits. Suppose you’re a couple with one child just learning to drive. Picture this scenario using the chart of Massachusetts fee increases on page 4. Your 16-year-old kid gets her driver’s permit, drives Dad to register the boat and file all the paper work he needs for his handgun, then drops Mom off at the city clerks’ office to record the refinanced mortgage. But on the way back to pick up Dad, young speedy gets pulled over. The officer compliments you on your “Basketball Hall Fame” vanity license plate and reminds you that you can appeal this traffic violation, which you plan on doing. Setting aside the costs of gas, car insurance, the boat, the handgun and all the accessories, the fee increases on these services add up to $673. These increases alone would take almost 80% of your tax savings right out of your pocket. How’s that for crimping your efforts to revive the economy? If the Bush tax cuts revive the stalling economy they will do so in spite of the large fee increases levied by states across the U.S. with Massachusetts leading the way. If anything, these state fee increases not only diminish, but, for some people, even eliminate, the tax cuts passed by Congress and signed by the President. Raising fees while denying they are tax increases is a political sleight of hand. The appetite for revenue provides an opportunity for public officials once again to ignore the need for real budgetary reform of Medicaid, Medicare, and Social Security. When it is not lurching for the last dollar, the grabbing hand of government loves nothing more than the label conveniently called a “fee.” (Endnotes) 1 Richard Wagner, “Taxation of Alcohol and the Control of Social Costs,” in Taxing Choice: The Predatory Politics of Fiscal Discrimination, William F. Shughart II, (New Brunswick, NJ. 1997), p. 227. 2 National Conference of State Legislatures, State Budget and Tax Actions Preliminary Report 2003. 3 Ralph Thomas, "Creativity counts as states plug budget gaps," The Seattle Times, 24 July 2003. A11. 4 Rick Klein, "Mass is called No. 1 in fee hikes," The Boston Globe, July 24, 2003. p. A1 5 Ibid, p. A1. 6 USA Today, "States gobble up tax breaks," July 8, 2003. p. 12A.     Christopher Boyd is a candidate for a Master's degree in Public Administration at Suffolk University.

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