Toolkit Topic

The Difference Between a Fee and a Tax

This is an item in our Local Government Toolkit

Taxes are collected to raise the revenue necessary to fund the local roads, law enforcement, fire department, and other services that cannot be attributed to a single user or beneficiary. This is in contrast to fees, which fund services that can be measured and attributed to an individual user (such as water).

This distinction may sound semantic, but for local government officials such as yourself, the difference is a matter of state law and has important legal ramifications. For example, in 1985, Utah enacted a “Truth-in-Taxation” law that requires local governments to officially notify residents of proposed tax increases. Notably, this process is not required for increases to services that can be classified as fees (such as a water service rate increase).

Some cities and counties, desiring a politically easier avenue than raising taxes to make up for budget gaps, have noted this difference. They subsequently passed ordinances that create a “Transportation Utility” in an attempt to fund road maintenance through fees that are charged on a bill for a different utility.   

As noted by courts in Utah and also in other states, this tactic is on shaky legal ground—precisely because the transportation fee being charged on a utility bill is a flat charge that is not being measured and attributed to a single user. In other words, the Transportation Utility Fee is unlikely to meet Utah’s legal and constitutional definition of a fee.

We urge cities and counties to acknowledge the difference between fees and taxes and to cease adding legally questionable fees to existing utility bills.

Are you a local elected official and interested in chatting with us more about this topic? Please reach out to us at—we’d love to chat!

Relevant Libertas Work:

Op-eds and Articles:

External Resources: