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The Empire of Fees

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from the magazine

The Empire of Fees

How charges and fines drive government growth Spring 2022
Economy, finance, and budgets
Politics and law

When I wake up in the morning at my home in Austin, Texas, I turn on the lights, and thereby provide a few cents to the city government’s electric company. I flush the toilet, owing a few more to Austin’s sewer service. When I pour myself a glass of water, the city water department gets a piece. After I get dressed and step outside, I watch the city take my trash, my recycling, and my compost—each pickup costs a few dollars. Sometimes, I discover a $25 ticket for parking my car in the wrong spot. Then I swallow my anger and drive down the MoPac highway, where I pay a toll to the Central Texas Regional Mobility Authority. I park in a garage downtown owned by the Austin Transportation Department, pay them a few bucks, and walk to my office. If I need to take a trip out of town, I pay $1.25 for a Capital Metro District bus to the city-owned Austin-Bergstrom International Airport, where, along with the price of my plane ticket, I pay a $5.60 fee for the benefit of being patted down by a TSA agent, a Passenger Facility Charge, and a small part in any rents the city charges restaurants and retailers. Only when I’m in the air does the drain to the government stop.

In one typical morning, I handed over money to several government bodies. But I didn’t pay any taxes—only fees, charges, and fines. These are the future of government in the United States.

The idea that government operates just by taxing and spending money is anachronistic. A growing share of its revenue comes from charges that the government imposes in exchange for its services or as a penalty for breaking its rules. In 1950, about 1 percent of Americans’ income went to charges from state and local governments. Today, that number is 4 percent. Include federal fees and charges, themselves the fastest-growing part of federal revenue, and that number rises to over 5.5 percent. Though largely hidden from the public, fees and charges account for most of the growth in government over the past 70 years and have become the top source of revenue for state and local governments.

Two factors drive this new reliance on special charges. First, governments are expanding the “businesses” they run—hospitals, universities, airports—and forcing users to pay more for them. Second, governments are using charges to avoid voter opposition to, and constitutional restrictions on, raising taxes. Those hoping to restrain the size of government need to understand the role of fees and charges. Though governments complain about private citizens evading taxes, the biggest tax evaders are governments themselves: charging citizens while avoiding anything that might be called a tax. In the process, they’re nickel-and-diming Americans from cradle to grave.

Not every government service can be paid for with fees. Governments must provide what economist Paul Samuelson called “public goods”—things that benefit everyone and from whose benefits no one can be excluded. It is both wrong and impossible for the government to impose fees for public goods, the classic examples of which are public safety and clean air. A city can’t charge for the use of public safety because it benefits whoever happens to be there. Borderline cases, such as parks and local roads, could potentially exclude anyone who couldn’t pay; but in practice, it’s easier for a government to keep these amenities open to all and fund them through general taxes.

But for many “private goods,” from which people can be excluded, charging individuals directly for services is easier and more justifiable. Private companies run some roads, parks, and golf courses and impose fees for their use. Governments can provide such private goods and charge fees for their use, too.

What distinguishes a fee from a tax? The technical definition is that you pay a fee in exchange for some activity that you could have avoided: taking a toll road, parking illegally, or patronizing a government business. Many politicians and policy wonks justify the growth in charges as a move away from taxes to “user fees.” They argue that people who benefit from a government service should be charged for it. On one level, this is true. It’s better to charge people for using a public golf course than to make it free and have the general public pay for it. Charges both prevent the rationing that occurs with any free good and help align the costs and benefits of services.

Yet the larger question is whether the government should be providing these services in the first place. A user-fee system beats a general tax, yes—but it also demonstrates just how many private goods governments now provide. If government can charge for something and prevent those who don’t pay from using it, it’s not a public good. Democratically elected governments regulate or subsidize businesses all the time. But should the government really be appointing the CEO of the golf course and purchasing its landscaping equipment?

City governments are responsible for much of the growth in fees and charges. They have become accustomed to running all sorts of businesses and charging for them, usually in direct competition with private companies. One in every five golf courses in the United States, for instance, is a municipal course. The U.S. is home to municipal universities, hospitals, retirement communities, industrial parks, power plants, tech incubators, parking garages, shopping malls, convention centers, hotels, stadiums, arenas, and theaters. Most large American cities own several municipal housing complexes. All charge their so-called customers to sustain city budgets.

City governments now run all sorts of businesses and charge for them, usually in competition with private companies—one in every five golf courses in the United States, for instance, is a municipal course. (Jeffrey Isaac Greenberg 6+/Alamy Stock Photo)

Politicians claim that they run these businesses to reduce charges on citizens. What looks like an increase in government fees, they say, is just a switch away from more expensive private options. Yet governments tend not to run businesses more efficiently and instead use subsidies and regulations to push out private alternatives.

The subsidies to these public businesses often become larger than the charges themselves. In 1991, Memphis built a 20,000-seat, pyramid-shaped arena that would supposedly pay for itself by charging rents to a major-league sports team. As befits a pyramid, however, almost no living soul set foot in the place. The city now collects a modest rent from a Bass Pro Shops megastore located inside while continuing to lose millions. Other local governments have had similar problems renting out their municipal hotels and shopping malls.

The old saying of former Indianapolis mayor Stephen Goldsmith holds true: if you can find three examples of a business in a local phone book (today, we would say online), then the city should not be in that business. But while selling off these assets is a no-brainer, cities keep building more of them, hoping that the charges will ease their budgets. More often, the businesses weigh them down.

Cities also run noncompetitive businesses, or what are known as natural monopolies: electric, water, gas, and sewer lines—and sometimes, highways, ports, and airports. Though these services are not public goods by the usual definition, it is not easy to have two or more competing companies provide them. A stronger argument exists for government involvement in these sorts of enterprises, though governments themselves do not have to run them. (As E. S. Savas shows in Privatization in the City, turning these services over to private companies can cut costs and increase efficiency by 30 percent, on average, and their fees can still be regulated.)

To see how direct government ownership of a so-called monopoly can increase both fees and government spending, consider public transit. In the early post–World War II period, private companies ran and operated most bus and rail systems in the United States. Their fees were regulated and occasionally subsidized by city governments. With some federal assistance, including that provided by the Mass Transportation Act of 1964, many cities began buying these private companies. In 1970, the fees charged by municipal transit still covered their cost. But by 2020, public transit users covered only one-fourth of the systems’ cost—about $16 billion—while federal, state, and local governments paid $60 billion. The total amount of charges had risen, but the taxes and subsidies to support inefficient operations grew even more.

Charges and fees in cities have gone from 11 percent of city budgets a few decades ago to 40 percent today—more than any other single revenue source. Taxes didn’t fall. Charges simply rose more rapidly.

“Charges and fees in cities have gone from 11 percent of city budgets a few decades ago to 40 percent today.”

While city governments run brick-and-mortar businesses, state governments’ business portfolio is more expansive. States run tolled highways and large ports or airports, as well as some liquor businesses held over from the post-Prohibition era. But they also administer esoteric financial concerns. For instance, many states along the Gulf Coast manage hurricane-insurance companies for property owners and, of course, charge for the benefit. States also run student-lending corporations, mortgage companies, business-lending companies, farm-lending companies, property-insurance companies, auto-insurance companies, and other enterprises. Some states operate their own bank-deposit-insurance businesses, separate from the more well-known Federal Deposit Insurance Corporation program.

We think of some of these businesses as social support, but states run them for profit and sometimes exploit their position to extract more money. Consider workers’ compensation programs for on-the-job injuries. While some states allow employers to purchase this insurance from a subsidized public company or from private firms, others, such as Ohio and Washington, allow businesses to purchase it only from the state-owned workers’ comp company.

These financial businesses aren’t usually good investments for states. Sure, they bring in regular interest and premium payments. But thanks to lax government accounting standards, they don’t have to take off bad loans until they’ve already gone bust. Thus, state budgets show large revenues from these programs, even as they falter and fail. Many remember the hundreds of millions that the federal government lost on loans to solar-power company Solyndra, but similar state-level examples abound. Rhode Island, for instance, once guaranteed $75 million in loans to a local video-game company, which quickly failed.

States’ annual financial reports helpfully contain a section on their “Business-Type Activities,” which demonstrate their scope. State businesses together hold over $600 billion in assets, making them larger than Walmart and Amazon combined. When off-balance-sheet public corporations and authorities are accounted for, state businesses hold over $1.5 trillion in assets, making them larger than the five biggest corporations in America combined. These proliferating businesses explain why state charges, though not as ubiquitous as those in cities, have swollen to more than 25 percent of state revenue. The charges have almost doubled as a proportion of states’ revenues in recent decades, and therefore account for most of the growth in state budgets.

Universities and hospitals are the two largest sources of revenue for both state and local governments. The “eds and meds” that power many urban centers constitute about half of all government charges. Public hospitals earn almost $175 billion annually in patient fees, and public universities bring in $125 billion annually in tuition and other fees—all this on top of billions of dollars of public subsidies.

Since education and health care are the two fastest-growing parts of the American economy, government’s expansion into these fields is unsurprising. But few areas of modern life are more sclerotic than a public hospital or a public university, both of which tend to jack up fees while providing declining service. Governments can improve the quality of education and health care without owning and operating these institutions at an increasing loss to the public.

Public hospitals earn almost $175 billion annually in patient fees, on top of billions of dollars of public subsidies. (New York Rat/Alamy Stock Photo)

The most visible government charges are the regulatory fees and fines for drivers’ licenses, construction permitting, illegal parking, and so on. The increase in such fees—and their expansion into every corner of modern life—has been rapid. For instance, governments today find it impossible to resist imposing charges on anything with a motor. Fees have risen on issuing titles, licenses, and registrations for cars, boats, all-terrain vehicles, snowmobiles, motorcycles, and planes. Anyone who actually uses these vehicles will pay other fees. Dozens of cities now charge drivers for the costs of responding to on-the-road incidents. The Cost Recovery Corporation, a company from Dayton, Ohio, has made a business helping cities charge motorists hundreds of dollars after they are in a traffic accident.

If such charges once made sense under a user-fee model for drivers who benefited from public roads, they are less defensible today. State and local governments are diverting tens of billions of such charges, as well as general gas taxes, to mass transit, bicycle paths, and so forth. These charges aren’t user fees, and they don’t align costs and benefits. They’re just another way to extract revenue.

Any living thing today is subject to licenses as well as fees. Many cities require annual dog licenses, with larger fines if you somehow forget to renew such an essential piece of paperwork. The Department of Agriculture has special licenses for those who want to sell or exhibit animals. This means that magicians who pull a rabbit out of a hat must get a federal rabbit license for $40. If you want to keep chickens in Texas, you’ll need at least $35 for a Fowl Registration Application. For flora, you must apply for, and then periodically renew, a plant-nursery license. If you want to sell plants at a temporary location, however, you’ll need a special-event license with another fee. Then there are marriage licenses, which can cost over $100 in some states. (I once witnessed two slightly tipsy individuals try to get married in a Washington, D.C., office. The man was yelling that the fee had gone up since the last time he was there; the woman then started yelling, since he had told her that he’d never been married before.)

Licensing fees have become a revenue source for government. Economists across the political spectrum have been outraged by the increase in occupational licensing, which now forces about 30 percent of all workers to obtain government permits to do their jobs. These licenses restrict competition and raise prices, but economists ignore how they also raise money. The New York State Division of Licensing Services, which unironically places its title next to a “New York, State of Opportunity” logo on its paperwork, extracts fees from every imaginable profession. Nurses must pay up to $228 to apply for their first license and another $103 for periodic renewal. Interior designers pay $377 to apply for their initial license. Cosmetologists pay $15 for taking their written exam, $40 for their initial license, and another $40 for renewing their license every four years. The state licensing division helpfully notes that such application fees are nonrefundable: if you apply but don’t have the interior-designer qualifications, the state keeps your money.

States claim that these fees are necessary just to administer the licensing agencies. But most states have a version of what Arizona calls the 90–10 rule: 90 percent of fees go to the agency, but the general government still keeps 10 percent. In reality, the legislature often sweeps any so-called excess funds from these agencies back into the general budget. Many such fees bear no relation to costs. Courts have upheld fees even if they are three times higher than any plausible costs to provide licenses or services.

Even basic government functions have become riddled with fees. In some cities, “Pay for Spray” programs require people to pay annual firefighter subscription fees and more whenever firefighters respond to an emergency call. In Olbion County, Tennessee, firefighters have let houses burn when they realized that the homeowners were in arrears on their subscription. Prisoners have found themselves subject to everything from co-pays for doctors’ visits in the infirmary to phone charges of up to $1 per three minutes, rates not seen in the private sector for decades. Many jails also have “pay to stay” charges. In Mahoney, Ohio, the jail charges a $100 booking fee and $50 for each night spent in lockup.

Also bothersome to citizens are the unexpected fines, from parking tickets to jaywalking charges, that have come to define many local governments. The increase in fines came to public attention in 2014, following riots in Ferguson, Missouri. It turned out that the city’s income from fines doubled in the years after 2010, reaching 23 percent of its total budget. And Ferguson’s fines were no exception. A study by Governing found dozens of local governments getting more than 50 percent of their total budget from fines, with many governments garnering higher than 90 percent. Every year, state and local governments collect about $15 billion in fines, with speeding tickets, of course, being the most important source. But dozens of other minor fines can surprise people. Many cities have laws requiring bicycle registration. Though haphazardly enforced, failure to get a license can get you a $50 fine in New Jersey. You might also be fined for riding a bike without the required bell.

While state and local fees and fines have been the biggest drivers of government growth, federal fees are mounting, too. They now constitute 10 percent of federal revenue, or more than $330 billion a year. Despite the gradual decline of the largest source of federal fees—namely, the U.S. Postal Service—such fees have grown more rapidly than any other kind of federal revenue over the past four decades.

Propelling the growth in federal fees are premiums for Medicare, as well as crop-, flood-, and bank-insurance programs; fees for the Transportation Security Administration at airports; fees for patents and trademarks; and rents from federal land. Federal agencies love these fees because once they receive them, they can spend them without having to go through congressional appropriations and oversight.

The federal government also leads the way in civil-asset forfeiture—the taking of private property on the suspicion that it was used for a crime. It raises more than $5 billion a year from such forfeitures, much of it shared with state and local governments. Usually, these funds are insulated from legislative or congressional oversight; often, the proceeds directly benefit the police who make the seizures. One study noted that federal civil-asset forfeiture takes more from citizens every year than burglars do.

An important reason for the increase in fees and fines is that they allow government to increase revenue sub rosa, without voter input or judicial control. Since the 1970s, many citizen groups have secured constitutional amendments that let voters weigh in on tax increases at the state or local level. Not surprisingly, voters have been reluctant to increase taxes. Thus, more governments have been boosting their fees, and courts have agreed with them that such fees aren’t subject to the same constitutional restrictions.

Though fees are theoretically distinct from taxes, many are taxes in all but name. For instance, after California’s Proposition 13 capped property-tax rates, the state gradually replaced property taxes with hikes in “impact fees” for building new housing. These can cost over $150,000 per unit, enough to buy a home in much of the United States. Most of the increase in license fees and trash-pickup fees have come in the wake of similar state constitutional restrictions.

Some citizens and taxpayer groups have tried to limit charges and fees, with little success. In 1980, Missouri passed the so-called Hancock Amendment, requiring voter approval for any new “tax, license, or fee.” State courts kneecapped the law by interpreting the word “fee” to exclude any charges “for services actually provided,” thus protecting most government fees. In a 2010 referendum, California voters approved Proposition 26—the Stop Hidden Taxes Initiative—to redefine certain regulatory fees as taxes subject to a two-thirds vote of local residents. Almost every local government in the Golden State has since ensured that its fees count as one of the enumerated exceptions.

State laws in Illinois, Texas, and California mandate that governments prove the connection between the charges they impose and the services they provide—but in reality, these laws have spawned an industry that writes elaborate user-fee studies showing, for instance, that waste-pickup charges should account for millions of dollars of city administrative overhead or that a new housing development causes a dozen more visits to a city park, which itself costs hundreds of thousands of dollars. These studies have less to do with actual costs than with letting governments charge whatever the citizen will bear. Since governments don’t include the cost of user-fee studies themselves in their estimates, these must be covered by taxpayers. They’ve become just another subsidy created by the charging of fees.

“Any new federal constitutional restrictions on fees are unlikely, but Congress can make these fees more transparent.”

For many government functions, the move to fees can be an improvement. Fees force those who benefit from a program to bear the burden of sustaining it. But fees should be a substitute, not a supplement, for raising taxes. Instead, as currently structured, charges and fees let government both expand and draw on more subsidies and taxes. They are a way around accountability, not a means toward it.

The fight against the inexorable growth of government must contend with charges and fees. The best way to limit them is to attack spending in general. Many states already do this; today, 15 states have limits on overall spending growth. Most of these, however, allow either the shifting of burdens to local governments (which don’t have the same limits) or easy overrides by the legislature. The 1992 Colorado Taxpayers Bill of Rights Act, which limited the increase in total state and local government spending to population growth and inflation, is a better model. Despite obvious skullduggery by politicians and bureaucrats, Colorado and states that have imitated it manage to control taxes and spending more than most. An Arizona state judge recently struck down a 3.5 percent income surtax because the amount of funds raised would have busted through the constitutional spending limit.

Efforts to rein in extraneous fines have borne fruit. Some states cap fines to a certain proportion of a city’s budget. After the Ferguson issue came to light, Missouri said that cities could not raise more than 20 percent of their budgets from fines. This figure is not particularly encouraging, but it’s a start. More promisingly, the Supreme Court, in the 2019 case Timbs v. Indiana, finally applied the Eighth Amendment clause against excessive fines to state and local governments. In this case, the government took a $42,000 Land Rover that plaintiff Tyson Timbs had bought with the insurance money from his father’s death. The government claimed that the car had been used to carry drugs. Some revenue-hungry jurisdictions may now think twice before charging large fines or seizing property.

Any new federal constitutional restrictions on fees are unlikely, but Congress can make these fees more transparent. A bipartisan bill, the Agency Accountability Act, would end bureaucrats’ control over their own fees and deposit them back into the general Treasury fund. This would end the practice of keeping such revenue as a bottomless kitty outside of congressional oversight. So far, however, the bill has not advanced in Congress.

Citizens are catching on that taxes and charges are both symptoms of a wider problem: the abstruse, impenetrable nature of proliferating government programs. To limit taxes or fees without limiting the spending that enables them both is to delay the inevitable. Fees are the latest trick that government has devised to expand its scope, but they won’t be the last. If we want to stop pouring money down the government drain, we need to curb spending itself.

Top Photo: Any living thing today is subject to licenses as well as fees: even magicians who pull a rabbit out of a hat must get a federal rabbit license for $40. (Charles Walker Collection / Alamy Stock Photo)

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