Whether a government charge is a tax or a fee is of great importance under the state's requirement that tax increases receive a 2/3 vote for approval. Often the line between the two can be blurred, however, which is why it is good to have a bright line test to help clearly define if a proposed revenue increase is a tax or a fee.
A recent ruling by the U.S. Government Accountability Office (GAO) provides a good cheat sheet to use. In a ruling yesterday declaring California's E-Waste Recycling Fee is in fact a tax and not a fee, GAO found (legal citations omitted):
"The Supreme Court has described a tax as an 'enforced contribution to provide for the support of government.' However, a fee charged by a state or political subdivision for a service rendered or convenience provided is a permissible fee and not a tax. Regulatory fees are assessed against an identifiable class of persons as part of a regulatory scheme to defray the cost of regulating the particular business or activity engaged in by such persons (e.g., permit and license fees).
Distinguishing a tax from a fee for service requires careful analysis because the line between tax and fee can be a blurry one. In determining whether a charge is a tax or fee, the nomenclature is not determinative, and the inquiry must focus on explicit factual circumstances. One court has described a classic tax as one satisfying a three-part inquiry—an assessment that (1) is imposed by a legislature upon many, or all, citizens, and (2) raises money that (3) is spent for the benefit of the entire community.
On the other hand, a classic regulatory fee is imposed by an agency upon those subject to its regulation, may serve regulatory purposes, and may raise money to be placed in a special fund to help defray the agency’s regulation related expenses. When the characteristic of a charge places it somewhere between a tax and a fee, the most important factor becomes the purpose underlying the statute or regulation imposing the charge in question. If the ultimate use of the revenue benefits the general public, then the charge will be considered a tax; the charge will more likely be considered a fee if the revenue’s benefits are narrowly circumscribed."
According to Washington's Department of Revenue (DOR):
"Generally, '[i]f the primary purpose is to raise revenue used for the desired public benefit, the charges are a tax. If the primary purpose is to regulate the fee payers -- by providing them with a targeted service or alleviating a burden to which they contribute -- that would suggest that the charge is an incidental tool of regulation.' 'If the money must be allocated only to the authorized purpose, the charge is more likely to represent a fee rather than a tax.' And '[i]f no [factor three] relationship exists, the charge is probably a tax in fee’s clothing.'"
| Characteristic | Tax | Fee |
| Purpose | To raise revenue | To regulate for public welfare or to charge as a user fee |
| Application | Applied uniformly in the taxing district | Applied to persons receiving services or for the cost of off-setting the regulatory burden incurred by the fee payer |
| Use of funds | General use, for public benefit | Specific use and directly related to the regulatory purpose |
Even if something is clearly a fee, it can become a de facto tax increase if the funds are swept for general spending purposes. This is why "dedicated" accounts should become truly dedicated and not easily swept.
During her 2011 State of the State Address Governor Gregoire said, "Let's adopt a user pays policy so that when only a few benefit from the service, they pay for it."
This market-based government funding policy received a lot of attention at the Governor's Budget Transformation Committee meetings which I participated in. Here is idea number 34 from the Committee's non-consensus report:
"Charge user fees: Charge fees where there is a clear nexus and clear beneficiaries, but collect fees on a cost recovery basis. Before doing so, eliminate related tax exemptions and ability to sweep account fund balances."
While we are strong supporters of reasonable user-fees, we believe "dedicated" accounts should be protected to help ensure fund balances aren’t easily swept by lawmakers, in effect creating de facto tax increases.
According to the state's balance sheet, the Governor and Legislature have authorized more than $1.2 billion in fund transfers of dedicated accounts for the 2009-11 budget.
To help facilitate the move to more user-pay funding models for government service, dedicated tax and user-fee accounts should be protected by a higher threshold to sweep their funds.
One possibility is to require a supermajority vote in order to raid a dedicated account. Dedicated tax and user-fee based accounts could also have some type of breaker formula to help reduce the tax/fee level after a certain fund balance is reached so balances don’t get too large and become targets of fund sweeps in the first place.
While the state has far too many separate accounts, those that have "dedicated" funding sources should be protected while the others should become candidates for consolidation into the state's General Fund.
As we reset state spending for the 21st Century we should look for state services that are candidates for user-fees but should do so in a manner that ensures that the revenues generated actually go to providing the promised services and don't become back door tax increases to circumvent the 2/3 vote requirement.
