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The Appropriate Role of User Fees and Charges in State and Local Finance

• The Foundation Fiscal Partners
• Executive Summary
• The Appropriate Role of User Fees and Charges in State and Local Finance

Summary of Proposal

April, 1998--July, 1999

The NCSL Fiscal Affairs Program will convene a working group of legislators, legislative staff, and public and private sector representatives to accomplish the following tasks:

• Define user fees and charges and explain how they differ from taxes;
• Identify trends in state and local reliance on user fees and charges;
• Develop a set of principles for the appropriate use of user fees and charges in financing state and local services.

The group will publish and distribute a short report, targeted to state legislators and legislative staff, that includes the definitions, finance trends, and principles identified above.

Why "User Fees and Charges?"

Phase IV of the Foundation Fiscal Partners project addressed two key issues in state-local relations:

• How should state and local governments divide service responsibilities?
• How much discretion should states give localities to raise revenues?

During NCSL background research on this issue, legislators and staff in several states commented that user fees and charges played a critical--but often ignored--role in state and local finance. As a result of tax limitations and restrictions on local taxing authority, many local governments are relying on user fees and charges to an unprecedented degree. Also, in the current anti-tax climate of the 1990s, states are also turning to user fees and charges to fund programs. Some legislators and staff commented that reliance on user fees and charges may have peaked in their states.

In presenting the results of the local option tax report to state legislative committees and NCSL audiences, legislators expressed repeated interest in the user fee question. NCSL staff found that they did not have adequate answers to questions about trends in user fees and charges across the country. This is an area that is ideal for additional research.

In addition, the popularity of user fees and charges (as opposed to taxes) has led to controversy in some states about what is a user fee and what is a tax. Courts and legislatures have addressed this issue in the context of property taxes, property-related charges, and impact fees. This project would provide some guiding principles to states (not recommendations) on this issue by developing working definitions of user fees and charges.

The project will also examine the special case of impact fees on new development. It will examine studies on the incidence of user fees and address the appropriateness of impact fees for infrastructure finance and school facility construction.

Proposed Tasks and Project Timeline

Legislators, Staff, and NCSL Foundation Sponsors

Reviewed December 2003
Email statetax-info@ncsl.org for more information.
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