State and Local Fees
Issue
What criteria should state and local governments use when setting fees? Should local governments be allowed to assess new types of fees without legislative approval?
Policy
- Fees should be distinguished from taxes by setting them according to the categories now used by the Department of Finance. They are:
- Service and user charges for discretionary services. The state and local governments may charge whatever the market will bear if there is a private-sector alternative. If the government price is too high, the public will not buy or will go elsewhere. If there is no private-sector alternative, these fees should be set in proportion to the cost of the good or service provided.
- Licenses. License fees should be limited to the actual cost of issuing and enforcing the license because the license is not optional for those who want to engage in the licensed activity and because licenses otherwise become hidden taxes.
- Business regulatory charges. Regulatory charges are usually aimed at achieving the specific policy objective(s). The costs associated with such regulation should be documented so the regulated entities are able to observe whether the charges exceed the amount necessary to reach the objective(s).
- The Legislature should be required to approve the use of new types of local government fees and charges. If approved by the Legislature, local governments should establish by ordinance all fees charged for service and user charges, licenses and business regulatory charges so that a public process and action are required before any new fees are adopted. These fees should be fair, reasonable and limited to the actual cost of the service for which the fee is imposed. The revenue raised by all such fees must be used to offset the costs of providing those services. Local governments should take reasonable steps to send notice by mail at least 30 days prior to any public meeting regarding the proposed fee change to the last known address of each business affected by the fee.
- The Legislature should limit local franchise fee revenue to the amount required to recover costs associated with administering the franchise. In addition, the Legislature should require local governments to separately account for franchise expenditures so the public can assess whether the fee is set in an appropriate manner. At present, many local governments are substituting franchise fees for taxes – using them to help finance their general fund.
Business Impact
Fees are increasing at the state and local levels. The FY 2006-2007 budget was balanced in large part with the imposition of a “health impact fee” which is expected to raise about $400 million. The FY 2004-2005 budget was balanced in part with $395 million of fee, surcharge and co-pay increases. In addition, many local governments are considering new natural gas and electricity franchise fees, storm water utility fees, transportation utility fees and street light utility fees, among others. Developing criteria for setting fees and making sure that the fee level corresponds to actual costs should lead to fewer fee increases, more affordable fees and more accountable government.
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