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 used by Minnesota Management and Budget. 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. If a license fee exceeds the cost of issuing and enforcing the license, the fee should be reduced to eliminate the excess.
  
  
  • 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). If a regulatory charge exceeds the cost of regulating the activity, the charge should be reduced to eliminate the excess.
  
  
• 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 remain a relatively small part of state funding. In FY 2010, fees and charges represented $1.2 billion of the $20 billion collected in the "all funds budget." At the local level, a broad definition of fees is a much larger percentage of total own source revenue. For example, special assessments, licenses and permits, and charges for services totaled $1.7 billion and selected enterprise revenue was $3.4 billion. Total local own source revenue was $11.3 billion.

In 2010, the Legislature debated doubling the mutual fund registration "fee." This "fee" is the prime example of a "fee" that becomes a tax. In testimony it was reported that it costs the Department of Commerce less than $1 million to regulate the mutual fund industry. Yet, Minnesota's mutual fund registration fee raises about $25 million each year, before the proposed doubling. When fee revenue is used to subsidize the general fund or other unrelated funds, it becomes a tax.