Contact: Ron Roach (916) 441-0490

Inside Taxes Commentary -- October 1, 1995

Question: To fee or not to fee?

Fees, fees and more fees. It seems that just about anything that isn't taxed outright in California has a fee attached to it, so much so that California state and local governments are collecting $15 billion a year in fees and assessments.

Are they legitimate fees, like the cost of a driver's license, or are they taxes masquerading as fees?

For example, two Sacramento County Superior Court judges recently ruled in separate cases that "fees" were really taxes. One involved payments from makers of lead paints to finance a program that has general benefit to society as a whole. The other involved payments for environmental reviews of timber harvesting plans. The rulings found that these "fees" were really illegally imposed taxes that were not approved by two-thirds majorities of the Senate and Assembly.

Fees and assessments have become a source of revenue nearly equal to property taxes in California. In the 1970s, fees were about 12% of California state and local collections, and now they are 21% of the total tax and fee burden, much of it surrogate revenues for property taxes cut by Proposition 13 in 1978.

The explosion of fees has not gone unnoticed in Sacramento, where the Legislature this session approved SB 342, by Senator Tom Campbell, that would limit fees imposed by state agencies to the costs of the service provided.

The Legislature also has been concerned about various state agencies that depend on fines and penalties as surrogates for regular tax dollars. It approved SB 338, also by Senator Campbell, that would prevent a state agency from spending fine and penalty funds without a legislatively approved appropriation. This bill, according to the author, will allow agencies to remain neutral magistrates in dealing with administrative proceedings and to promote fairness in the assessment of fines.

The issues were raised at the recent annual meeting of the National Taxpayers Conference (NTC), an organization of state taxpayer groups that includes the California Taxpayers' Association.

The NTC adopted a resolution endorsing seven principles to use when fees are considered:

• Fees should not finance general government services that have broad benefit to the general community, such as law enforcement, fire services, libraries and education. Fees should support specific services, such as licensure or products provided to the payer of the fee.
• Fees should not exceed the cost of the service, including reasonable administrative expenses.
• Fees and services financed by fees should be voluntary for the payers of the fees. Mandatory exactions are taxes, not fees.
• The Internal Revenue Service distinguishes a tax from a fee, noting that a tax is not a payment for some special privilege granted or service rendered. A tax is an enforced payment authorized by law to raise revenue for public or governmental purposes. These definitions should be observed.
• The use of fee revenues should be carefully analyzed as part of a government's regular budget process.
• Penalties and fines imposed by regulators should revert to the general fund to prevent regulators from having a direct financial interest in the amount of fines and penalties assessed.
• Fee revenue should not be used to pay for services other than those for which the fee is charged. If fees produce excess revenue, the amount of the fees should be reduced, rather than be used for other governmental purposes.

Policy makers should observe principles of the NTC resolution that provide a common sense safeguard against a dangerous trend that increases the burden for taxpayers.