The findings of the International City/County Management
Associations 2009 State of the Profession Survey (covering 2,214
cities and counties) demonstrate widespread user fee interest.
Among various fiscal strategies, 46 percent of local agencies
surveyed reported an increase in user fees, while 23 percent added
new fees. With such broad-based activity, the advantages and
disadvantages of user fees warrant reexamination as public managers
wrestle with wavering revenues.
Appropriate user fees may assist in shaping a more sustainable
fiscal future. While certainly no panacea, they facilitate
economic, equity, accountability, public interest, choice, and
informational objectives. However, they also may introduce
inequities and present a host of troublesome hurdles.
User Fees and Equity
Governmental entities require revenues, including equitable user
fees, to provide services. User fees assess costs on voluntarily
purchased, specific services. Such services are beyond those
enjoyed by the general public. They reflect individual preferences
and relative affordability compared to the services available to
the general public and paid for through general revenues. The
equity intent is that the special service beneficiary pays in
proportion to the benefit received.
User fees, according to John Mikesells book Fiscal
Administration: Analysis and Applications for the Public
Sector, require two necessary conditions: benefits
separability and chargeability. Separability refers to an efficient
method to segregate or deny services to nonpayers. Chargeability
means there is an effective way to establish and collect an
appropriate user cost.
These conditions guard from the subsidization of a benefit
identified with a particular individual rather than the general
publica key issue being whether individual beneficial use can be
distinguished from general use. Unsurprisingly, because of the
prevalence of economic self-interest, all levels of government
struggle with distinguishing which services are individually
specific and call for an equitable user fee.
User fees may have inequitable effects and should not be deployed
merely to cover other faltering revenues in tumultuous times. They
do not provide simple solutions to financial difficulties or easy
bandages to help heal wounds. They must engage elected officials,
practitioners, and the public in fiscal soul searching regarding
strategies to sustain accessible services.
Federal User Fees
The U.S. Office of Management and Budget (OMB) Circular A-25
specifies a general national user fee policy. It covers activities
subject to user fees, as well as how to set and implement fees. It
also addresses transactions that result in specific benefits above
those received by the general public where no other federal
legislation is controlling. General objectives are threefold:
- guarantee that federal services to specific recipients are
- ensure full-cost recovery through user fees for special
- permit private enterprise to compete with the federal
government for comparable services where appropriate.
Federal policy restricts user fees, prohibiting fees when a
specific beneficiary is unclear and the benefit accrues broadly to
the general public. User fees must recover the full service cost.
However, exceptions are made:
- courtesy exemptions to foreign governments and international
- collection exemptions where recovery cost imposes extraordinary
- exceptions based on special conditions formally reviewed by
OMB Circular A-25 promotes user fees encourages the removal of
restraints on user fees, and makes federal agencies accountable for
establishing them. It requires biennial reviews for fee adjustments
and new fees. Further, it mandates that federal legislative
proposals with special benefits must consider imposition of user
Beyond general user fee policy, Congress often specifies user fee
provisions statutorily. This may be in terms of agency authorizing
or appropriations legislation. Sometimes the government uses policy
discretion to underprice a fee or exempt a fee altogether to
encourage publicly beneficial behavior. Examples include
- setting a U.S. Food and Drug Administration prescription drug
review fee to encourage new development
- exempting low-income taxpayers from an application fee under
the U.S. Internal Revenue Services Offer in Compromise Program to
promote accessibility and participation.
Fees may recognize that service costs may vary among diverse users.
A fee may be user-specific or reflect a system-wide average. The
U.S. Governmental Accountability Office reports that the federal
government manages the trade-offs between advantages and
disadvantages. Legislators may consider the purpose, the fee level
in comparison to other user costs, and the cost variance between
users. Occasionally, Congress provides fee exemptions, waivers, and
caps to advance policy interests.
State and Local Government User Fees
State laws provide discretion to state and local governments in
establishing user fees. Such fees are collected for engagement in
certain activities and for regulatory purposes. The fee amount is
linked to the service cost. Sometimes, the payment may not relate
directly to the costs connected with a specific beneficiary, but is
more loosely associated with a discrete group of beneficiaries.
The fee signals that the individual beneficiary or group
beneficiaries receive something beyond those services normally
available to the general public and covered by taxes. Using
California as an example, the state provides discretion to cities
and counties to impose fees under conditions fairly similar to the
federal governments policy guidelines:
- fees must not exceed the service cost
- fees must offset the service cost and not be used for general
- fees may include overhead and indirect costs proportionate to
the services share of these costs.
Specific service beneficiaries are not always clear, however. Some
services have a combination of mixed general and specific service
characteristics. Consequently, government officials wrangle over
who benefits, how much they benefit, and how to finance the
service. To simplify, general and specific services may be
portrayed on a public financing continuum with four gradations.
Figure 1 illustrates such a continuum, with the character of the
service associated with financing vehicles.
Categorizing and Relating Services to Financing
Public agencies must categorize services and relate them to a means
of financing. Understanding the extremes of the financing continuum
(Figure 1) comes most readily. On the one side, general services
require general revenue support (mandated governmental levies not
associated with individual services). A public agency does not deny
anyone from a general service. Moreover, one persons service
consumption does not compete with another persons consumption.
For instance, police service covers law enforcement for a
jurisdiction. The entire community demands and receives ongoing
protection even though a particular crime may result in only one
victim in the community. Similarly, general public safety for the
community does not compete with public safety provided for a
On the other side, the term specific services apply to those that
exhibit a market character. For example, local government utilities
and waste disposal represent services provided by some public
agencies to individuals. These services fall to user fees because
of the specific personal benefit link. Additionally, the individual
beneficiaries have the ability to influence their specific service
consumption. They can decrease use to lower their fees or increase
use if they are willing to pay for more.
Mixed services comprise the most controversial area of the
financing continuum. Typically, public agencies supply many
services that are not pure from a general versus specific services
viewpoint. This reflects other values competing with efficiency,
like social equity. This often results in some mix of taxes and
user fees to cover the cost of particular services. General revenue
subsidies run the gamut from heavy to light subsidies. This is
especially common with the local governments in which elected
officials thrash out public financing policy judgments through
contentious hearings. Often, this results in certain services being
partially subsidized through public policy rationales.
User fees are modeled after private-sector pricing in which
consumers pay for their specific service preferences. They are not
intended for general services because it would be either
undesirable or too difficult to exclude nonpayers. Author D.G. Duff
observes in his article Benefit Taxes and User Fees in Theory and
Practice that user fees may be unsuitable for services distributed
according to right, need or merit. For example, activities
involving public education, public safety, social services, and
indigent health issues are considered unsuitable for user fees.
User fees require analysis from multiple viewpoints and ongoing
management. From an economic theory perspective, resource
efficiency occurs to the extent that the price of a public service
reflects the associated costs. The Public Finance Quarterly article
The Revenue Potential of User Charges in Municipal Finance reports
that user fees that do not fully capture associated costs lead to
inefficiencies, cross-subsidization, and over expenditure.
Elected officials and practitioners, ideally with citizen input,
seek to assign where various services fall on the financing
continuum. Once assigned, elected officials retain accountability
to ensure that user fees are thoughtfully constructed, equitably
enforced, and respond to operational changes made in the public
interest. They must make modifications as needed to facilitate the
many benefits of user fees while minimizing any disadvantages.
For example, many local governments find that community swimming
pool fees have difficulty covering operational costs. Moreover,
such fees may effectively exclude poor families or seniors on fixed
incomes. This could preclude the most likely users and deny
segments of the community an attractive recreational outlet.
In the public interest, the city council may choose to subsidize
the program heavily, waive fees for certain user groupssuch as
children under the age of 16 and seniors over 65 years of ageor
make pools available for free. Through monitoring, the council may
find some families treat a free pool as free child care, leaving
children unattended (except by the lifeguard) for several hours.
This may result in distracting or unruly safety conditions and
deter other community residents from enjoying the pool. The public
interest may call for enactment of rules requiring adult
supervision, limiting hours, or offering a fee-based or free child
care service for extended pool visits.
Advantages of User Fees
User fees contribute several advantages to public financing.
Payments directly register the service demand of those who
Measuring service demand while collecting offsetting revenue to
cover those provided addresses basic economic production questions.
This improves allocative efficiency in as much as citizens express
their service preferences. In turn, the public agency may increase
efficiency by shifting correspondingly to meet service demands by
allocating the necessary resources.
Conversely, Edward J. Bierhanzl and Paul B. Downing advise in an
Atlantic Economic Journal article that disengaging the
consumption of specific services from the direct payment for them
provides incentives for over-consumption as well as for
overproduction. For example, because the general taxes that
citizens pay lack a direct linkage to the use of services, the
price to obtain additional units becomes inconsequential. This may
result in increased demand from citizens not required to cover the
marginal costs of additional benefits.
User fees may improve finance equity for certain
This possibility exists where they replace a general tax subsidy
for benefits received only by specific individuals. This enhances
fairness by saddling the specific service beneficiaries with their
proportionate cost through user fees. For instance, general taxes
may support street lighting throughout a community. Establishing
several street lighting districts may replace the need for general
taxes. Instead, the districts could have customized rates tailored
to street lighting service by district. These districts, over time,
may chose to increase or to decrease street lighting with a
corresponding change to their respective rates structures. This
correlates direct benefits with proportionate charges.
Linking the supply of certain public services with
production costs facilitates more rational political decisions and
User fees provide service price information and capture service
cost recovery. This neutralizes the net impact of the specific
service from the aggregate cost of government. In other words, if
there is no service request, no user fee is collected. With a
service request, an appropriate full-cost user fee negates the
incremental, marginal cost impact to the public. This linkage
promotes accountability when such revenue must offset only the
service from which the revenue resulted.
Governmental authority to set a fee does not limit the fee
to only offsetting service costs.
With a finding of a public interest rationale, agencies lower or
cancel existing fees to influence citizen behavior. Economically
struggling inner city retailers may persuade a city council to
replace metered parking with free parking to entice shoppers.
Public financed museums may enrich a community culturally and
cultivate long-term aficionados by waiving admission fees for
children and offering free days.
Mass transit fares may be heavily subsidized or suspended to
promote ridership. In turn, parking pressure may be alleviated,
congested eased, and air quality improved. User fees may ration
services to those most willing to pay as well as induce citizens to
sample or to make greater use of public services through waivers
User fees motivate citizens and public agencies to explore
For instance, a citizen can choose to do without a service to avoid
costs. User fees raise resistance regarding service appetites.
Given disposable income limitations and economic choice, is an
individual ready to exchange resources for the desired service? Is
the benefit worth it?
From a governance perspective, these questions activate the equity
functions of a user fee. They protect the public from the
subsidization expense of the specific benefits accruing only to an
individual. They self-regulate, or deter, some from making a demand
for a government service that benefits only the requestor.
This curtails governmental costs. Indeed, Bierhanzl and Downing,
found that greater reliance on user fees results in lower
government expenditures. Concurrently, resistance to user fees
sometimes motivates policymakers to choose to drive costs down by
reevaluating public service delivery modes, including outsourcing,
privatization, and public-private partnerships. Hence, user fees
represent a self-regulating, moderating device that motivates
choices and curbs the total volume of governmental services and
Accurate user fees inform the public about the value of a
They clarify what public services cost. This reduces demand by
connecting service consumption knowledge and payment. Without the
connection between service consumption and user fees, little
motivation exists for citizens to consume efficiently. User fees
remedy this gap by
- answering economic production questions while improving
- enhancing finance equity for some services
- facilitating rational political decisions and accountability
- providing a means to influence public interest citizen behavior
- motivating exploration of choices by citizens and public
- informing citizens about the value of governmental services.
Disadvantages of User Fees
User fees generate disadvantages also. Regardless of their
benefits, user fees face substantive hurdles. Some of the more
- determining which public services seem sensible to finance
through user fees
- calculating the correct user fees
- countering the inequitable effects of user fees vigilantly
wherever they occur
- establishing the net benefit resulting from changing financing
- evaluating the political feasibility of executing a change.
On the one hand, non-existent and under-priced user fees subsidize
individual beneficiaries at the expense of the general taxpayers.
On the other hand, inaccurate overpriced user fees subsidize the
general taxpayers at the expense of individual beneficiaries.
Despite limitations, effective fee structures enhance the
efficiency effects and other advantages of user fees. However,
Bierhanzl and Downing stress that the information provided by even
an incorrectly set user fee restores the consumption-payment link
and restrains individual service demand.
User Fees Are No Panacea
In reexamining user fees, public agencies should not view them as a
panacea. Indeed, Mikesell lists several limitations to user fees.
First, they do not substitute general taxes since many public
services are shared by the general public. Second, some services
may exclude low income and disadvantaged individuals if they are
only provided through user fees. In this instance, a user fee may
deny an essential service or create an inequitable effect. Next,
some user fees pose expensive collection costs. For example, mixed
goods (those exhibiting a combination of general and specific
characteristics) may lend themselves to some level of user fees.
However, the development of the charging mechanism and the costs
for operating and monitoring it may exceed the projected return. In
addition, political and equity issues may arise when benefit
recipients feel they have already paid for certain services through
general taxes. Finally, denying services to those not paying the
fee can be politically unpopular. The import of these disadvantages
lies in informing and sharpening the analysis in constructing and
applying prudent user fees.
Revisiting User Fees
Public managers have been encouraged to leverage change through
market-oriented mechanisms. Such encouragement foresees that
government will never outrun demand if it only focuses on supplying
services. Public agencies must determine what market mechanisms
contribute to managing service demand.
User-fee design involves trade-offs among the advantages and
disadvantages arising from establishing and fine-tuning these
instruments. Appropriately targeted and accurately designed user
fees offer compelling advantages. They facilitate economic, equity,
accountability, public interest, choice, and informational
objectives. Duff contends that these advantages, when conveyed to
voters, can be made politically acceptable.
At the same time, public managers should not hastily pursue user
fees without carefully considering their problematic nature. It is
tough to determine which services call for user fees and calculate
them. Inequitable effects may be introduced, the net benefit may be
uncertain, and citizen resistance may stymie deployment
politically. Certainly, the arguments here catapult user fees to
the front trenches in carefully considering options for coping with
challenging fiscal times. A more comprehensive understanding of
user fees aids public managers in analyzing when, where, and how to
employ or not to employ them.