The content below is an excerpt from our Guide to Local Government.
Fees are a user-based approach to payment for services that cover a specific service, or the related costs of that service, which is utilized by the individual being charged the fee. When charging a fee, the use of the service must be measurable so that the charges accurately reflect an individual’s actual use.
For example, you may charge a fee for water or electricity based on how much is used in each household. Or perhaps you decide to fund the privately-contracted waste collection by charging a fee per bin, calculated by the actual cost of what it takes to provide garbage service.
The common thread in these situations is that the fee amount is measurable and tied to the use (or non-use) of the related service. Fees should not be used as creative ways to raise revenue or bypass processes to increase tax rates.
Fees are distinct from taxes. General taxation through property and sales taxes contribute to your general fund, which can be used to fund the various services required to run a local government. These services tend to provide a general benefit to the residents of your jurisdiction and those who live in or pass through your community.
For example, it is very difficult to quantify the specific benefit of public safety and fire protection for each resident. Consequently, these services are funded through general taxation. While fees are specific to a measurable activity some local governments have instituted fees to help make ends meet when it comes to the cost of providing general services.
This tendency is understandable. Utah’s Truth in Taxation process can make it difficult to raise taxes without drawing the ire of your community. This can lead some officials to seek out new avenues of revenue generation that are politically easier and quicker to enact.
With so many demands on your budget, it can be incredibly tempting to misuse fees, especially since they appear to be an equitable solution.
However, courts have determined again and again that there is a distinct difference between a fee and a tax, and that in the case of the latter, the Truth in Taxation process must be followed. Your residents have a constitutional right to be protected from improper fees.
The case of V-1 Oil Co. v. Utah State Tax Commission (1996), heard in the Utah Supreme Court, established some of the earliest precedents on the difference between a fee and a tax.
Specifically, the ruling determined that “to be a legitimate fee for service, the amount charged must bear a reasonable relationship to the services provided, the benefits received, or a need created by those who must actually pay the fee. This requirement is intended to prevent a fee from being used to generate excessive revenues and becoming indistinguishable from a tax.”17 V-1 Oil Co. v. Utah State Tax Comm. October 29, 1996. Justia No. 950156.
Enacting fees requires being precise and should be reserved for funding specific and measurable services, not as a way to raise revenue, regardless of the transparency and accountability measures that are set up.
Avoid looking to the utility bill as a means to solve revenue issues.
“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned — this is the sum of good government.” —Thomas Jefferson
Case Studies
Many counties and cities in Utah are facing a problem: roads are wearing out and need to be replaced. This is an expensive project, and raising the funds for such a project creates a challenge. The Utah Legislature has diminished the amount of funds available to local governments by moving away from exclusively funding roads with gas taxes and instead relying on sales tax earmarks.
A long-term solution is required to move back to a more user-funded model that would bring more revenue to local entities, such as a road usage charge or vehicle miles-traveled type of program.
In the meantime, some cities have pursued the idea of adding a fee for transportation onto the utility bill in order to raise revenues for transportation expenses and projects. This is constitutionally and legally problematic. Those who have pursued this policy have known these risks from the beginning and proceeded with eyes wide open down this risky path.
One Common Approach: Risk the Lawsuit
Pleasant Grove is among several cities that have instituted a Transportation Utility Fee (TUF) to address their infrastructure needs. At first glance, it doesn’t appear to be a poor policy to provide a service like roads equitably. However, it is not a service where the use can actually be measured, and thus it is not a service that can be funded by a fee. The Fourth District Court supported this assertion when they ruled on a lawsuit organized by Libertas Institute over the adoption of a (TUF).18 This decision has been appealed and is currently being considered by the Utah Supreme Court (as of July 2021).
The court elaborated that, “generally speaking, a tax raises revenue for general governmental purposes, while a fee raises revenue either to compensate the government for the provision of a specific service or benefit to the one paying the fee or to defray the government’s costs of regulating and policing a business or activity engaged in by the one paying the fee.” 19 Utah Sage Inc. v. Pleasant Grove City. (4th District Court of Utah County, Utah February 12, 2020), No. 190300164.
The court determined that the TUF does not qualify as a regulatory fee. However, many have considered whether it is not a service fee since the money is going exclusively toward a service provided by residents. When this issue was brought to the courts, it was decided that the TUF does not qualify as a service fee because the benefit is not isolated to the person paying the fee.
It is extremely difficult to measure who uses the roads and how much, and so the same fee would be charged to the elderly widow who doesn’t own a car as the family of ten with five vehicles. Additionally, as the court pointed out, this benefit is also extended to non-residents who use the city’s road system without paying anything at all.
A Better Way: Embrace Truth in Taxation
The fact is that roads are going to need to be funded out of your general fund made up of collected taxes and fees. This means that the only way to increase the funds for your roads is to increase your certified tax rate or reallocate existing funds. This may seem difficult, but the discussion with your residents needs to be had.
The dialogue between you and your citizens through the Truth-in-Taxation process is not designed to be a difficult one. The main purpose behind Truth-in-Taxation was to provide a level of transparency, and in fact, it provides you with a better opportunity to explain your government’s needs, such as funding transportation in your area.
When Truth-in-Taxation is done in the sunlight and citizens are provided with enough data to make them feel an increase to the certified tax rate is justified, the process need not be so difficult. The dialogue between you and your citizens for the need for a certified tax increase is a key tenet of Utah’s unique property tax law.
This conversation makes Truth-in-Taxation the model for the country, ensuring that government services can be provided with necessary funding, while still maintaining taxpayer engagement and ensuring rates don’t rise exponentially or automatically.
That being said, going through “small” increases to the certified tax rate each and every year, as some entities do, makes the process much more dark. Doing this hides the cost of government to the taxpayer, and makes it much more difficult in the future to justify a larger increase to pay for major maintenance of roads or an increase in salaries to public safety, as an example.
Costs do generally rise, which is why it is appropriate to go through raising the certified tax rate every 5 -8 years. Showing citizens the cost of inflation in road maintenance or other city services will help your citizens understand more clearly why the increase is necessary.
In your work as an elected official, you will likely be involved in the provision of utilities to your constituents. This could include anything from garbage services to water and electricity. The nature of these services sometimes make them an appropriate candidate for a fee.
One Common Approach: Adding Line Items to the Utility Bill
Utility fees should not contribute to your general fund. They are not another form of taxation, nor are excess revenues “profit” that should be transferred to the city. They are specific and user based, and where too much is collected, rates should be lowered to match the actual cost of the service.
You should never overcharge for services and allocate the additional funds towards an unrelated project. Some cities have begun using the utility bill not just for actual utilities, but to raise funds to pay for things like public safety and debt service on broadband infrastructure.
These are inappropriate ways of using the utility bill and when combined with municipal enterprise fund transfers, leaves transparency and accountability to residents lacking.
A Better Way: Keep It Organized
Utility fees must be reasonable. A reasonable utility fee is one in which the cost of the service for constituents is at or near the exact amount it costs to provide that service. When funding utilities by means of a fee, you should only charge what it costs to facilitate that service and ensure those funds go directly towards dispensing that utility.
Better yet, make your process clear and simple so that your constituents know that the fees they pay are directly funding the service they are paying for. Keep an organized ledger that tracks the funds that come in and go out for a specific service. Be proactive in helping the public see that this is being managed responsibly.
Charging only what a utility costs a constituent, and no more, is not just courteous — in many cases it’s the law. This establishes that fees that exceed actual costs of utilities are unlawful. Do not attempt to create unlawful taxation by using a fee.
Conclusion
Managing your local government funding is one of the most important jobs you have. To this end, specific processes have been set in place governing fees and taxes. Confusing these two undermines the delicate (and controversial!) processes that citizens rely on to ensure their tax dollars are used appropriately. Misusing fees will never end well for you or your constituents.
As you work to ensure that your fees are appropriately assessed and allocated, keep in mind these key takeaways:
- Fees are very different from taxes.
- A fee is user-based and funds a service that can be measured.
- The money collected from a fee should directly fund the service for which it is collected.