PORTLAND, Ore. – A new report released by Cascade Policy Institute suggests numerous ways state and local governments can lower the costs of public services through judicious, targeted use of “user fees,” rather than relying on general taxation. Resurrecting User Fees in Public Finance: A Prescription for Lowering the Cost and Improving the Fairness of Public Services was authored by Randall Pozdena, Ph.D. Pozdena is president of QuantEcon, Inc., an Oregon-based consultancy.
The share of personal income collected as revenue by state and local governments has doubled since 1945. Oregon and other U.S. state governments obtain approximately 75 percent of this revenue through broad-based taxation and 25 percent from fees levied on the beneficiary of the service.
This report details the theoretical and practical advantages of reducing reliance on broad-based taxation in favor of user charges. It reviews the economic philosophy of reliance on user charges versus broad-based finance and the findings of the public finance literature. These key findings are:
- The total cost of public services would decline. By making users of services and facilities aware of the costs associated with their use, spending would be limited only to those services for which consumers get benefits commensurate with their user costs.
- Because user fees, unlike broad-based taxes, are only paid if one uses a service, the public or private providers of the services are incentivized to provide a service of value and at the minimum cost. This effect is particularly pronounced if users also enjoy choice of the provider of the service.
- User fees link the generation of revenue intimately to the specific service or facility used. This avoids the “trust fund” or “trough” financing model that allows political lobbies to direct the allocation of revenues and provision of services to those with political power, rather than what is beneficial to consumers overall.
- The result is more efficient and equitable provision of services because of the closer nexus of financing burden and receipt of benefits from the services.
The report also examines historical and current patterns of state and local spending and revenue collection. The review of these practices reveals that increased reliance on user charges is both practical and desirable in K-12 education, higher education, health services, public safety, and transportation infrastructure (especially highway and transit services). Together, these services constitute approximately 50 percent of state and local public spending in Oregon and other states in the aggregate, but in total have less than 5 percent reliance on properly designed user fees at present.
Cascade President and CEO John A. Charles, Jr. commented, “Switching from general taxation to user fees would be a more progressive way to pay for infrastructure because those who consumed the most would pay the most. This is how we pay for electricity, gasoline, and thousands of other commodities.”
User fees can completely, or near-completely, replace broad-based taxation in key areas of public spending, and consistently yield better outcomes and lower costs. This would be a benefit to state and local government budgets and, ultimately, to the taxpayers who finance them.
Cascade Policy Institute is Oregon’s free market public policy research organization. Cascade promotes public policy solutions that foster individual liberty, personal responsibility, and economic opportunity. The full report by Cascade Policy Institute may be viewed here.
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