By Holley H. Ulbrich

In response to the revolt against the property tax, now two decades old, state and local governments have tried to diversify their revenue sources. Some of that diversification meant more reliance of local income taxes and local sales taxes. In 1976, 4,893 local jurisdictions imposed local sales taxes. By 1994, that number had grown to 6,579, including local governments in four states that first authorized this tax during that period. The number of local governments with income taxes rose over the same period from 3,088 to 4,111. In other cases, specialty taxes were tapped to supplement the property tax--accommodations taxes, parking taxes, gasoline taxes, cigarette taxes, taxes on transfers of real estate. But the dramatic change in the revenue mix at the state and local level, ever since Proposition 13 in California kicked off the property tax revolt in 1978, is the rising importance of fees and charges.

The annual Census of Governments reports that current charges provided state and local governments with over $147 billion in 1993--$57 billion for state and $90 billion for local governments, accounting for about 15% of general revenues for both levels of government. In South Carolina, the share is much higher. Twenty-one percent of all general revenue comes from current charges, but only 13% of state general revenues. Fees and charges are concentrated at the local level, where they account for 25% of general revenues.

The U.S. Advisory Commission on Intergovernmental Relations (ACIR) reports a combined category of user charges and miscellaneous revenues, which groups fees and charges with such other revenues as interest earnings and sale of property. (Charges and fees make up about 2/3 of this category in Census reports.) According to ACIR reports, these non-tax local revenues increased their share of total state and local revenues by about 50% between 1978 and 1992. For states, fees, charges and miscellaneous revenues rose from 12% to 18% of all revenues, and for local governments, the increase was from 16% in 1978 to 23% in 1992. In 1992, the category called user charges (another name for fees) netted $537 per capita for state and local governments. South Carolina was above the national average at $653 per capita.

The distinction between a fee and a tax is not as simple as it may appear. Some taxes are clearly a payment for general government services unrelated to how much of those services the taxpayer may use. Income and sales taxes fall into this category, and to a lesser degree, property taxes. Some fees are clearly a quid pro quo, with the citizen paying a fee for a particular service, as in renting a cabin at a state park or putting quarters in a parking meter.

Even without a direct exchange of payment for a specific service, many fees have a close connection between those who pay and the users of the services these fees support. In many communities, dog licenses pay for the animal shelter and the animal control officer. Highway tolls and tennis court fees are usually dedicated to paying for the roads and tennis courts and keeping them in good repair. Until recently, textbook rental fees in public schools in South Carolina paid for the books the children used.

The hospitality fee that has been approved by some South Carolina municipalities is closer to a tax than a fee, because it is earmarked for infrastructure or services that are not used exclusively by those who pay an extra 1% or 2% on their restaurant meals. There is some linkage in that the people who eat in local restaurants are more likely to be visitors, which means that they may be a little more likely to use the parks, improved sidewalks, or other facilities than the average local resident. But the link between payment and benefit is not nearly as close as putting quarters in the parking meter or paying a sewer tap-on fee. The same kind of partial linkage between payers and users can be found for that part of the South Carolina alcoholic beverage tax that is earmarked for alcohol and drug prevention and treatment programs, or the gasoline tax paid by highway users that goes into a highway fund to build and maintain roads. But in both these cases, the payments are called a tax rather than a fee. The hospitality fee, the gasoline tax, and part of the alcoholic beverage tax are all most accurately labeled as either a benefit tax (because those who pay the tax are the main beneficiaries of the service it funds) or an earmarked tax (because the funds are not available for general purposes but must be used for a designated purpose).

Between communities and states, there is an amazing variety in what is paid for by specific fees versus what is paid for through general taxes. Some communities charge for recreation, or solid waste pickup, or access to parks and tennis courts, while others do not. Toll roads are common in the Northeast, less so in the rest of the country. School systems in some states provide their students with paper, pencils, rulers and other supplies, while in other states all the student receives is a shopping list. The state of South Carolina covers an above-average share of the cost of its excellent system of state parks and recreation areas with fees rather than taxes, while in some states there are no charges for using these facilities. Many communities provide fire protection through taxes, while others--often served by volunteer fire departments--charge a fee, and only put out fires for subscribers. Historically, virtually every service governments provide has been offered on a fee basis by either government or private providers, including roads, schools, fire and police protection, water, lighthouses, street lights, and solid waste collection. Some of these differences reflect regional patterns. The six New England states only derive less than 1% of own-source revenue from charges and fees, about half the national average, while the 12 Southern states are at twice the national average. Other differences reflect the mix of services being provided by the state and local public sector, or the amount of state aid given to local governments, or the mix of other revenue sources being tapped.

What kinds of things should be paid for with fees and charges rather than taxes? Are fees fairer than taxes? Do fees exclude the poor from public services? Is it easier to raise revenue this way? Is there some optimal balance between tax-financed services and charging fees to individual users that applies to every county and city, or should it vary from one to another depending on the kinds of services demanded and the size of the property tax base? These are questions that economists as well as state and local public officials have had to wrestle with. The goal is to meet demands for public services in ways that minimize the pain of collecting the money while make citizens feel that they are being treated fairly and getting their money’s worth from government.

There is a small town in upstate of South Carolina that operates a water system. That water system serves several developments outside the city limits. The system is old, and the pipes leak, and the color of the water isn’t always clear. Some of the outside customers complained to DHEC (the state Department of Health and Environmental Control), which relayed those complaints to the mayor. He responded by cutting off the water supply to customers outside the city, explaining that he was aware of the problem, but the city just didn’t have the money to pay for repairs and improvements. The needed work, he said, would add about $19 a month to the average household water bill. The complainants responded with outrage that they didn’t see why they should have to pay for those repairs!

This story really illustrates the problem of relying solely on tax financing for state and local services. Some of those services benefit nontaxpayers, who will demand more and better services because they don’t have to pay for them. Other services benefit just one group of citizens--tennis players, perhaps, or a particular neighborhood, or families with teens. If everything is paid for with taxes, those who are vocal or organized or persistent will compel others to pay for services to benefit their particular interest group, whether that group is water customers, tennis players, bird watchers, senior citizens, or local retailers. Where it is possible to clearly identify those who benefit, those individuals should pay an appropriate share of the cost, even though it’s not always easy to determine exactly what that share should be. In general, though, the more that the benefits are confined to an identifiable group, the larger the share of the cost that should be borne by that group rather than taxpayers as a whole.

Using taxes for common goods. Obviously, not all public services lend themselves to support through fees and charges. Citizens all share many common goods, such as police protection, city hall, street lights, beautification and green space at the local level, the state museum and DHEC at the state level. It is difficult to identify those individuals who benefit from each of these services. Some people just benefit from knowing that the service is there, like police and fire protection, even if they don’t actually make use of it. Property owners see the value of their property rise if the community has amenities like parks and recreation programs even if they don’t use these services themselves. For such common facilities and services, the best choice is to pay for them out of the common fund by levying property, income, sales and other taxes.

Using taxes to encourage consumption. Tax financing is also more appropriate for services where there is a desire to encourage citizens to use more of the service. Some cities have free immunization clinics for children, give away trees for beautification (paid for out of taxes) or offer free pickup of discarded Christmas trees and grass clippings so that these items will not wind up in the landfill when they can be put to appropriate use. Charging a fee for these services would reduce the use of these services when everyone benefits by having more consumption instead of less.

Using fees to control demand. When users know that they will be charged a share of the cost, they may demand less. So fees not only distribute the cost burden more fairly, they also provide some check on demand for publicly provided services. Communities that have adopted "pay as you throw" fees for solid waste pickup have seen a dramatic decline in the amount of trash put out at the curb and a big jump in recycling when residents have to pay for each trash bag they fill. Public tennis courts have shorter lines when they are metered.

Using fees to tax visitors and commuters. In many cases, it’s difficult to limit the benefits of services provided to the local residents who fund them out of their taxes. Fees provide a way to get some payment from those people who come into the city, park, use the library or the tennis courts, throw their trash (hopefully!) in the city’s trash containers, stroll along the city’s nature paths, and visit the city zoo, but don’t pay city taxes. Local sales taxes are aimed at the same group of "free riders," but fees and charges allow the city, county, or state to target the actual users of the service.

Using fees for tax relief. Another prime purpose of fees and charges, besides controlling demand and making beneficiaries pay, is to hold down taxes, especially property taxes. The property tax has become very unpopular, but there aren’t very many good alternative taxes for local governments that can raise enough revenue without driving away potential residents, businesses, and industry. So anything that can be financed through fees rather than taxes provides some relief from the threat of higher property taxes. As a general rule, it is easier to get citizens to pay for a specific service than to pay general taxes for shared goods and services.

Using fees to finance infrastructure: impact fees. Increasingly, fees rather than taxes are seen as an appropriate way to provide for local infrastructure. Infrastructure lasts longer than the average resident stays in town--the typical American family moves every seven years!! So there is a real question of who should pay for roads, parks, police stations, recreation complexes, and other local public facilities--those who live there at the time that the facilities are built, or those who later move in and enjoy their use. Tax financing, and even to some extent bond financing, puts a disproportionate share of the burden on those who live in the community during the construction period.

In the last decade, more and more communities around the country, and several in South Carolina, have addressed this problem of equity between old and new residents by levying impact fees on the development of undeveloped property. The rapidly growing coastal town of Mount Pleasant was a a pioneer in the use of development impact fees to cope with escalating infrastructure needs. When a vacant lot suddenly springs to life with a house, an apartment complex, or a commercial facility, there is increased pressure on city services and particularly city infrastructure. With tax financing, much of the burden would fall on established property owners, since the property tax does not capture the full cost of additional service for most kinds of newly developed property. If a city must expand its sewer system, build a fire substation, or add garbage trucks or police cars to meet increasing demand, it seems appropriate to assign that cost to its source--new development. Impact fees levied on development are an answer to this problem. Impact fees are earmarked for specific kinds of infrastructure linked to the growth of population and buildings to be served.

Mixing taxes and fees. Many services at both the state and local level are financed through a blend of taxes and fees. Leveraging tax dollars with fees makes tax revenues stretch farther to provide more and better state and local services. Often water or sewer systems are funded primarily out of user fees but get some assistance from the state or local general fund for capital costs. Recreation facilities are sometimes built with tax dollars, while operating costs are supported by fees. A mix of tax financing and user fees is appropriate when some of the benefits accrue to particular individuals, while other benefits are for the community as a whole. For example, a recreation complex may also house a community center available to many groups for public meetings. And the very existence of the recreation complex makes the community more attractive and increases housing values, even for those who never use it. Public schools, likewise, benefit the whole community, not just the children and their parents, so it is appropriate that most of the cost falls on taxes rather than fees. Higher education also generates benefits to the state as a whole. South Carolina’s major universities and the TEC system have played an important role in attracting industry and upgrading the workforce, and their research and public service activities benefit citizens and firms across the state, so there is clearly a role for some tax funding. On the other hand, however, more of the benefits of higher education go to the individual getting a degree in the form of higher earnings than in the case of elementary and secondary education, so the student bears more of the cost and less is paid for out of general tax revenues.

The primary concern about using fees and charges to pay for public services is that the cost may exclude some people who really need or want the service. That’s part of the reason for paying for public schools out of general revenues rather than fees. There is a consensus that children of poor families should get a fair shake at getting an education and won’t be kept out by the fact that they can’t afford to pay. In varying degrees, this argument also holds for recreation programs, health services, and fire protection.

Providing for the poor, however, doesn’t necessarily mean relying solely on tax financing. If communities choose to make services available "free" (i.e.., with no fee) to all in order to ensure access for the poor, most of the beneficiaries will be the non-poor, because there are far more people who are not poor! Remember, the poverty rate, even in South Carolina, is about 15%. Making public services or facilities free to everyone in order to ensure access for the poor means that 85% of the potential beneficiaries are not poor, and they will tend to overuse the facilities or services and demand more because they don’t directly experience the cost of those demands. These users can shift part of the cost of their tennis courts, recreation programs, trash collection and other services to other taxpayers who make little or no use of these services. And some of those taxpayers are poor people who own cars and/or houses subject to the property tax.

There are many ways to ensure access for the poor without letting more affluent users avoid payment. Free passes, discounts for identified groups, a mix of free programs and programs with charges, trading volunteer work for access to programs, and other forms of subsidy can assure that those in need aren’t left out without losing the benefits of at least partial financing through fees and charges.

In 1993, states (not counting their local governments) collected more than $57 billion in fees and charges, accounting for about 8% of state general revenues. The largest single source of fees in most states is higher education (tuition), which accounted for more than half the total. Other important sources of fee revenues are public education, hospitals, highways (including $3 billion in highway tolls), parks, recreation, and natural resources.

For South Carolina in that same year, the state reported over $1 billion in current charges, making up 13% of state general revenue. The state’s major revenue-raisers are such typical sources as college tuition ($530 million) and hospital charges ($408 million), as well as nearly $!6 million in park and recreation fees. But the general fund also shows revenue from such diverse sources as court fines, mental health fees, and parole and probation supervision fees. South Carolina also has a number of taxes that are similar to fees in that they are earmarked for specific services to those paying the tax, such as the fertilizer inspection tax.

Counties across the nation averaged $107.42 per capita in fees and charges in 1992, with hospitals as the largest single fee category. For South Carolina counties, fees and charges are reported on the annual report to the Budget and Control Board. Most fees reported on that form fall under the heading of service revenues, which includes 13 separate categories of fees and charges. Counties raised $55.43 per capita from service revenues in 1993-94. Another $7.83 per capita came from licenses and permits, which include some pure fees as well as some hybrids of fees and taxes--a few county business licenses as well as building permits, marriage licenses, mobile home licenses, utility franchise fees, and the documentary stamp tax.

Service revenues are an important and growing revenue source for counties, accounting for 27% of all own-source county revenues in 1993-94. Although counties report more than fourteen categories of service revenues, two types account for almost 2/3 of these revenues, waste disposal fees (32.7%) and law enforcement and legal fees (32.1%). Emergency medical services and library fees add another 11.8%, with the rest accounted

for by airport fees, impact fees, drug fines, fire protection fees, hospital fees, motor vehicle fees, parking, recreation and miscellaneous.

While the property tax is still the mainstay of county revenues in South Carolina (accounting for 61.2% of all locally raised funds), the rapid revenue growth has been in service revenues (as well as the closely related category of licenses and permits, which includes a mixture of fees and levies that are similar to taxes). Adjusted for inflation, service revenues grew 69% between 1990 and 1994, while licenses and permits were up 54% and the property tax only 21%.

Clearly South Carolina counties are following the national trend of shifting the mix toward fee-for-service and away from general tax financing. This trend is especially pronounced in those counties that have a lot of tourists or business visitors. Charleston, Horry, Beaufort, Dillon, Georgetown and Richland are all in the top ten counties in per capita service revenues.

South Carolina cities, like counties, still generate most of their own source revenues from the property tax (45.6% of the total in 1993-94). Licenses and permits, especially business licenses, are the second major source of locally raised revenues, accounting for 26.4% of all city revenues. Service revenues come in third at 17.1%. However, like counties, South Carolina cities have seen more rapid growth in these two nontax revenue categories, with service revenues up 38.8% between 1990 and 1994, licenses and permits up 26%, and property taxes up only 15.7% (all adjusted for inflation). Nontax revenue sources are even more important for cities than counties. In 1994, cities were collecting an average of $65.72 per capita in service fees and charges, and another $101.34 in business licenses and permits.

What kinds of fees are cities in South Carolina collecting? The mainstay of many smaller towns is still law enforcement and legal charges (including a lot of speeding fines). Among the communities with the highest per capita revenues from law enforcement fees and fines are some of the states smallest communities, with Aynor, Bluffton, Ridgeland, Edisto Beach, Payley’s Island, Bethune, Olar, Sellers, Yemassee, and Chapin in the top ten spots. However, waste disposal charges have been rising rapidly, passing law enforcement charges in 1993 to claim the number one slot. Solid waste charges, averaging $17.16 per capita in 1994, accounted for 26.1% of all locally raised city revenues, just ahead of law enforcement charges at $16.99 per capita and 25.9% of locally raised funds. Cities have been encouraged to charge fees for solid waste collection to control demand for landfill space, and collections have nearly doubled between 1990 to 1994 (even after adjusting for inflation). One hundred thirteen of the state’s 270 incorporated municipalities reported levying solid waste fees in 1994. Parking charges, fire protection fees (including, in some cases, fire protection for citizens outside the city limits), and recreation fees together accounted for another one-third of service revenues. Others listed included airport fees for a few cities, impact fees, EMS fees, housing and urban renewal fees, and miscellaneous fees.

Based on national trends and proposals surfacing at the state, city, and county level, citizens can expect to see continued increases in the use of fees and charges as an important supplement to taxes to pay for local, state, and even federal government services. In terms of specific fees, there are at least three trends to watch for. One is toll roads at the state level. A second is impact fees at the local level. And a third is increasing sophistication and expansion of solid waste fees, known as PAYT (pay as you throw).

South Carolinians are already aware of the highway toll issue. At least three such proposals have surfaced, one to make a better beach connection from I-95 in Horry County, one to build a Southern Connector around Greenville, and one to impose tolls at the Georgia and North Carolina lines on I-85 to help cover the cost of its maintenance and improvements. The alternative would be higher gasoline taxes, but there is a great deal of controversy over the equity of distribution of gasoline tax funds. Toll roads target users of particular roads more directly.

The use of impact fees to pay can also be expected to grow, particularly in communities in prime locations that are expanding rapidly and can impose such fees without fear of scaring off prospective development. A generation ago, the water, sewer and roads needed to support local growth were financed largely with federal and state aid. That kind of grant money has become much scarcer in the last decade, pushing local governments back on their own resources to finance infrastructure. Established residents generally have mixed feelings about growth in many cases, because it leads to congestion and pressure on city services. That resentment is likely to mushroom if new housing and commercial developments result in higher property taxes to expand infrastructure. The impact fee, earmarked for infrastructure and paid for by those who are placing added demands on that infrastructure, is often resisted by at least some developers but is very attractive to established residents and businesses. The notion of the impact fee is based on some very sound economic principles of assigning the costs to the person who created them whenever that is equitable and feasible.

Pay as you throw is the third trend, one that is already visible nationwide and in South Carolina cities and counties. PAYT usually takes the form of a charge per bag or per cart of waste collected, with no charge for separated recyclables. In some communities, trash is only collected if it is placed in color-coded bags available (for a fee) exclusively from city hall. The rising cost of land for landfills and the expense of building them to demanding federal specifications in order to prevent groundwater contamination has made local officials determined to reduce the amount of material going into landfills.

To date, much of the effort to control demand for landfill space has focused on voluntary recycling. Many counties offer convenience centers to take not only plastics, aluminum and glass but also newspapers, cardboard, magazines, motor oil, and other reusables. Cities facilitate recycling with curbside pickup in many communities. Educational programs and special pickups have succeeded in diverting Christmas trees, grass clippings, leaves and other yard wastes from landfills. However, voluntary cooperation has its limits, and further reductions in waste going into landfills will probably call for economic incentives. Fees are an ideal tool for this purpose. Communities that have adopted pay-as-you-throw, including several in South Carolina, have found it to be very effective in reducing the volume of waste going to the landfill. The growth of solid waste fees in South Carolina cities can be expected not only to continue but to shift from a flat fee per household to a fee related to volume.

Fees and charges are here to stay. They have won a well-deserved place in the financing structure of governments at all levels, but especially at the local level as a partial replacement for the property tax. Fees and charges play an important role in controlling demand for public services, assigning costs to those who create them, and apportioning the burden of financing government fairly among citizens. If there hasn’t been a sewage fee, an impact fee, a solid waste fee, a recreation fee, or a hospitality tax in your past, chances are there is one in your future. Americans have come to expect to get what they pay for in the private sector. Increasingly, they can expect to pay for what they get in the public sector.