Wednesday, December 24, 2008

What’s in a Name? That Which We Might Call a Fee By Any Other Name Would Be Called a Tax!

The title of this blog entry was inspired by famous English playwright William Shakespeare’s Romeo and Juliet, Act II, Scene 2. Juliet: ‘What's in a name? That which we call a rose By any other name would smell as sweet'". A reproduction of this famous scene follows:

O Romeo, Romeo! wherefore art thou Romeo
Deny thy father and refuse thy name;

Or, if thou wilt not, be but sworn my love,
And I'll no longer be a Capulet.

[Aside.] Shall I hear more, or shall I speak at this?


'Tis but thy name that is my enemy'

--Thou art thyself, though not a Montague

What's Montague?

It is nor hand, nor foot,
Nor arm, nor face, nor any other part
Belonging to a man.
O, be some other name!
What's in a name? that which we call a rose
By any other name would smell as sweet;
So Romeo would, were he not Romeo call'd,
Retain that dear perfection which he owes
Without that title:--Romeo, doff thy name;
And for that name, which is no part of thee,
Take all myself...

I take thee at thy word:
Call me but love, and I'll be new baptiz'd;
Henceforth I never will be Romeo.


What man art thou that, thus bescreen'd in night,
So stumblest on my counsel?


By a name
I know not how to tell thee who I am:
My name, dear saint, is hateful to myself,
Because it is an enemy to thee.
Had I it written, I would tear the word.



My ears have yet not drunk a hundred words
Of that tongue's utterance, yet I know the sound;
Art thou not Romeo, and a Montague?



Neither, fair saint, if either thee dislike.


How cam'st thou hither, tell me, and wherefore?
The orchard walls are high and hard to climb;
And the place death, considering who thou art,
If any of my kinsmen find thee here.


With love's light wings did I o'erperch these walls;
For stony limits cannot hold love out:
And what love can do, that dares love attempt;
Therefore thy kinsmen are no let to me.

Indirect Taxes, Eurostat, OECD Glossary (2001)

According to the Paris-based Organization for Economic Cooperation and Development (OECD), the term 'indirect taxes' is defined as follows:

"[I]ndirect taxes can be separated into three groups:—
  • The first comprises VAT and other deductible taxes directly linked to turnover (product sales & services) which are excluded from turnover. These taxes are collected in stages by the enterprise and fully borne by the final purchaser.

  • The second group concerns all other taxes and duties linked to products which are either: (1) linked to turnover and not deductible; or (2) taxes on products not linked to turnover. Included here are taxes and duties on imports and taxes on the production, export, sale, transfer, leasing or delivery of goods and services or as a result of their use for own consumption or own capital formation.

  • The third group concerns taxes and duties linked to production. These are compulsory, unrequited payments, in cash or in kind which are levied by general government, or by the Institutions of the European Union, in respect of the production and importation of goods and services, the employment of labour, the ownership or use of land, buildings or other assets used in production irrespective of the quantity or the value of goods and services produced or sold.

...For the purposes of national accounts, taxes on production and imports can be separated into five groups, the first and last of which are essentially then same as the first and third groups used in business statistics.

  • value added type taxes

  • import duties

  • taxes on imports excluding VAT and import duties

  • taxes on products except VAT and import taxes

  • other taxes on production."

"TAX - A sum that legislation imposes upon persons (broadly defined to include individuals, trusts, estates, partnerships, associations, companies, and corporations), property, or activities to pay for government operations. The power to impose and collect federal taxes is given to Congress in Article I, Section 8, of the U.S. Constitution. Collections that arise from the sovereign powers of the federal government constitute the bulk of governmental receipts, which are compared with budget outlays in calculating the budget surplus or deficit." [See: A Glossary of Terms Used in the Federal Budget Process, Fifth Edition, United States General Accounting Office (Sept. 2005) at p. 94, at: ].
"A hidden tax is a tax that is not visible to the taxpayer. These taxes can raise prices of goods and lower salaries for workers. Hidden taxes, although hidden, can decrease the purchasing power of individuals significantly." [See: Hidden Tax Wikipedia ].

"Purchasing power is the amount of value of a good/services compared to the amount paid with a currency." [See: Purchasing Power, Wikipedia at: ].

"[A] Hidden Tax [is] a tax that is not immediately apparent. For example, while a consumer may be aware of a tax on retail purchases, a tax imposed at the wholesale level, which consequently increases the cost of items to the retailer, will not be apparent." [See: Hidden Tax, BNET Business Dictionary, at: ].

"Hidden Tax: same as Indirect Tax". [See: Hidden Tax, Encarta at:].

"Indirect Tax: tax on goods and services: a tax levied on goods or services, instead of directly on companies and individual people". [See: Indirect Tax, Encarta at: ].

EXCISE TAX - An excise tax is a type of ad valorem tax that is imposed at the time of a purchase or sale transaction (sales tax or value added tax (VAT)) or in connection with importation across a political border (tariffs). The tax may be based on the purchase price or the declared value, or some standard estimate of a fair price: for example, the sales tax on used boat purchases in the United States is determined with reference to a published list of prices.

Excise taxes are often pledged for certain purposes. For example, a fuel excise is often used to pay for public transportation, especially roads and bridges and for the protection of the environment. Excises (or exemptions from them) are also used to modify consumption patterns. For example, a high alcohol or tobacco excise is used to discourage alcohol and tobacco consumption, relative to other goods. [See: Excise Tax - Law & Legal Definition, US Legal at: ].


Fighting Australia’s Over-regulation

By Senator the Hon. Michael Ronaldson

"...Red tape is a hidden tax. Australian individuals, families, communities and businesses are drowning in a sea of acts of parliament, delegated legislation, forms, non-essential procedures, licences, cumbersome judicial interpretations, rules, regulations and administrative policy.

By its very nature, government power creates transactional and compliance costs. As government assumes responsibility for and control over more and more facets of our society, the more the autonomy and independence of the individual is diminished..."


A ‘Hidden Tax’ Of Rules Hits Economy

By Clyde Wayne Crews and Ryan Young

Competitive Enterprise Institute

August 5, 2008

"President Bush's fiscal 2009 U.S. budget is the first to top $3 trillion. Federal spending has risen from 18% of GDP in 2000 to 21% today. The administration's spending explosion has been roundly criticized by both the right and the left.

What is less well documented are regulatory compliance costs — such as environmental, labor and energy efficiency mandates. As a result, too many remain unaware of the size and scope of regulation. Regulations are a "hidden tax" now estimated to cost business and consumers hundreds of billions, above and beyond federal spending itself.

In June, New York Times columnist Paul Krugman blamed inadequate food regulation for everything from health scares to foreign policy troubles with South Korea. The Republican administration now proposes sweeping new regulation of America's financial sector. Clearly, many have the impression that the American economy is as lawless as the Wild West.

To be blunt, that impression is wrong.

While the Dow collapses, we have a bull market in government regulations. The 50-plus departments, agencies and commissions are now at work on 3,882 rules; 757 will affect small businesses. More than 51,000 final rules were issued from 1995 to 2007. Those regulations are not free.

Enforcing and overseeing them costs $42 billion per year. A far bigger cost — one that is not counted in the budget — is compliance. Regulatory compliance costs of $1.16 trillion are now higher than Canada's entire 2004 GDP ($1.017 trillion).

At a time of lackluster 1% economic growth, the regulatory state costs 8.5% of U.S. GDP. Combined with the 21% of GDP consumed by federal spending, we have a federal government that absorbs nearly 30% of economic output. None of this includes state and local government, which push the burden of government up to 53.9% of GDP.

The Federal Register, which lists all new rules, ran to 72,090 pages in 2007. This was down 3.8% from 2006. The record year was 2004, which saw 75,676 pages.

Out of more than 60 federal departments, a mere five accounted for 45% of new rules. The departments of Treasury, Commerce, Agriculture, and Homeland Security, along with the EPA, instituted a combined 1,741 new rules in 2007.

Some rules cost more than others and deserve special attention. Of the new rules, 159 are 'economically significant,' meaning they will cost at least $100 million a year..."


Red Tape Rising: Regulatory Trends in the Bush Years

By James L. Gattuso

Heritage Foundation Backgrounder #2116

March 25, 2008

"[Through] the hidden tax of regulation...[t]he federal government...impose[s] a burden of some $1.1 trillion—an amount that is comparable to total federal income tax receipts. And the cost of regulation is getting higher... Since 2001, the federal government has imposed almost $30 billion in new regulatory costs on Americans. About $11 billion was imposed in fiscal year (FY) 2007 alone. Even more are on the way.

...Over 50 agencies ranging from the Animal and Plant Health Inspection Service to the Bureau of Customs and Border Protection have a hand in federal regulatory policy. Together, they enforce over 145,000 pages of rules, with purposes and impacts as varied as the agencies themselves. Some rules are meant to protect health and safety, some to protect (or sup­press) economic competition, and others to protect the environment.

Certainly, many of these regulations are justi­fied—and even necessary. For instance, most would agree on the need for security rules to protect citi­zens against terrorism, although the extent and scope of those rules may be subject to debate. More­over, imposition of a regulation is not per se incon­sistent with market principles. Some in fact reinforce property rights and market mechanisms.

Nevertheless, all rules come at a cost: a 'regula­tory tax' imposed on all Americans..."


A Tax Is Not a User Fee!

By Lawrence Reed

The Freeman Ideas on Liberty

June 1st, 1999

"Politicians and bureaucrats are notorious for manufacturing euphemisms—clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase 'revenue enhancement' entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say 'tax hike.'

At all levels of government, a bipartisan effort to impose new or higher taxes and mislabel them as seemingly less onerous “user fees” provides another example. Sometimes, a user fee is indeed a user fee. Other times, it’s not that at all. Instead, it’s a tax hike disguised by a misnomer.

When someone chooses to use a government service and pays for it, he’s paying a user fee. Furthermore, what he pays should cover the cost of the service he is receiving; if it goes for something he isn’t getting or doesn’t want, then he’s paying a little of both—a user fee plus a tax. Taxes differ from user fees in that paying them isn’t a matter of choice and what you pay is not tied directly to what you’re using.

In principle, true user fees make a lot of sense, especially if you want people to understand that nothing from government is truly 'free.' Indeed, the more government finances itself through user fees instead of taxes, the less it looks like government and the more it gets out of the redistribution business and begins to resemble private firms operating in free markets.

Instinctively, most people sense a certain fairness about true user fees. You pay for what you get, and you get what you pay for. Most people understand and support user fees for such things as toll roads, harbors and waterways, and even parks and recreational facilities. If they understand that private enterprise would probably do a better job with these things, they know that at least a user fee approach for government services gives them an opportunity to make a rational economic choice: buy it if it’s worth the price, patronize an alternative, or do without. All this makes for useful background to a victory that advocates of liberty and sound economics recently won in my state of Michigan.

In 1978, Michigan voters approved the Headlee Amendment to the state constitution. Among other provisions, the amendment requires voter approval before a tax can be imposed or increased. In its 1994 report, the Headlee Amendment Blue Ribbon Commission found that a growing number of Michigan townships, counties, and cities were skirting that requirement by mislabeling certain taxes “user fees.” The commission recommended that the legislature clarify the difference between a tax and user fee. The Michigan Supreme Court now has done what the legislature never got around to doing. Here’s how the case arose:

In 1995, the city of Lansing adopted Ordinance 925, known by many as the “rain tax.” It provided for the creation of a storm water enterprise fund “to help defray the cost of the administration, operation, maintenance, and construction” of a new storm water system that would separate sanitary and storm sewers. Heavy rains had occasionally caused the city’s combined sanitary and storm sewer system to overflow, discharging untreated and partially treated sewage into the Grand and Red Cedar rivers. Fifty percent of the 30-year, $176 million cost of the system was to be financed through an annual “storm water service charge” imposed on each parcel of property in the city. The city maintained that the service charge was a user fee and therefore did not have to be put before the voters for approval. But Lansing citizen Alexander Bolt had read the constitution and knew a tax when he saw one.

Bolt challenged the Lansing 'rain tax,' taking the case all the way to the Michigan Supreme Court, a majority of which on December 28, 1998, declared, 'We hold that the storm water service charge is a tax, for which approval is required by a vote of the people. Because Lansing did not submit Ordinance 925 to a vote of the people as required by the Headlee Amendment, the storm water service charge is unconstitutional and, therefore, null and void.' The decision established an important precedent that puts municipalities on notice that the voters who approved the amendment intended for it to be enforced, not subverted.

The Court’s majority opinion refreshingly argues that 'a primary rule in interpreting a constitutional provision . . . is the rule of ‘common understanding.’' In other words, in this case the intent of the voters should be of utmost importance, as opposed to some judicially activist fabrication. The Court affirmed that the voters intended to place limits on taxes and governmental expansion.

Just what exactly distinguishes a user fee from a tax? The Court advanced three main criteria: (1) a user fee is designed to defray the costs of a regulatory activity (or government service), while a tax is designed to raise general revenue; (2) a true user fee must be proportionate to the necessary costs of the service, whereas a tax may not be; and (3) a user fee is voluntary, whereas a tax is not.

The Lansing ordinance failed all three tests of a user fee. The Court determined that it constituted “an investment in infrastructure as opposed to a fee designed simply to defray the costs of a regulatory activity” and agreed with the dissenting opinion in a lower court ruling that the revenue from the charge was “clearly in excess of the direct and indirect costs of actually using the storm water system.” The Lansing rain tax applied “to all property owners, rather than only to those who actually benefit,” contrary to a genuine user fee. Moreover, the ordinance “failed to distinguish between those responsible for greater and lesser levels of runoff.”

Most plainly, the rain tax was utterly involuntary. True user fees are only “compulsory” for those who choose to use a service, but Lansing property owners in this case had “no choice whether to use the service” and were “unable to control the extent to which the service” was used.

The Court’s majority concluded by quoting the Headlee commission report, “This is precisely the sort of abuse from which the Headlee Amendment was intended to protect taxpayers.” Amen!

The message is clear to Michigan municipalities: You now have no legitimate excuses for mislabeling taxes as “user fees.” Be honest. If it’s a tax, put it before the voters as the Headlee Amendment requires and make your best case. You can’t junk the constitution just because you want the money. It’s a refreshing message that ought to be applied everywhere.

Lawrence Reed is president of the Mackinac Center for Public Policy, a free market research and educational organization in Midland, Michigan, and chairman of FEE’s Board of Trustees. As a member of the Headlee Amendment Blue Ribbon Commission, he helped write the portion of the commission’s report dealing with the user fee versus tax issue in 1994.


USER FEES - "Fees charged to users of goods or services provided by the Federal Government. In levying or authorizing these fees, Congress determines whether the revenue should go into the Treasury or should be available to the agency providing the goods or services." [See: United States Senate Glossary, at: ].

USER FEE/ USER CHARGE - "A fee assessed to users for goods or services provided by the federal government. User fees generally apply to federal programs or activities that provide special benefits to identifiable recipients above and beyond what is normally available to the public. User fees are normally related to the cost of the goods or services provided. Once collected, they must be deposited into the general fund of the Treasury, unless the agency has specific authority to deposit the fees into a special fund of the Treasury. An agency may not obligate against fees collected without specific statutory authority. An example of a user fee is a fee for entering a national park."

From an economic point of view, user fees may also be collected through a tax such as an excise tax. Since these collections result from the government’s sovereign powers, the proceeds are recorded as governmental receipts, not as offsetting receipts or offsetting collections.

In the narrow budgetary sense, a toll for the use of a highway is considered a user fee because it is related to the specific use of a particular section of highway. Such a fee would be counted as an offsetting receipt or collection and might be available for use by the agency.

Alternatively, highway excise taxes on gasoline are considered a form of user charge in the economic sense, but since the tax must be paid regardless of how the gasoline is used and since it is not directly linked with the provision of the specific service, it is considered a tax and is recorded as a governmental receipt in the budget. [See: A Glossary of Terms Used in the Federal Budget Process, Fifth Edition, United States General Accounting Office, supra at p. 100 ].

The difference between user fees and taxes:

User Fee- A fee assessed to users for goods or services provided by the federal government. User fees are normally related to the costs of the goods or services provided. Once collected, they must be deposited into the general fund of the Treasury, unless the agency has a specific authority to deposit the fees into a special fund of the Treasury.

Tax- A sum that legislation imposes upon persons, property, or activities to pay for government operations. When Congress imposes taxes, it need not consider benefits bestowed by the government on an individual but may base taxation solely on an individual’s ability to pay.
[See: User Fees FAQ’s, U.S. Customs & Border Patrol, at: ].

"The boundaries between fees and taxes are not always clear...In general, a user fee is related to some voluntary transaction or request for government goods or services above and beyond what is normally available to the public, such as a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. Taxes, on the other hand, arise from the government’s sovereign power to raise revenue and need not be related to any specific benefit, and payment is not optional; when Congress imposes taxes, it need not consider benefits bestowed by the government on an individual but may base taxation solely on an individual’s ability to pay...

...Fees vary in the degree to which they can be considered truly voluntary because the availability of reasonable substitutes varies. For example, to enter certain national parks, one must pay an entrance fee. The fee is voluntary to the extent that there are alternatives to national parks for outdoor recreation, for example, state, county, or private parks and recreation facilities. In contrast, people who want to operate radio stations have no similarly close alternative and must obtain a license from the Federal Communications Commission and pay a fee for that license.

[In United States v. La Franca, 282 U.S. 568, 572 (1931) (dealing with the legal distinction between a 'tax' and a 'penalty'), the Supreme Court ruled that a tax is 'an enforced contribution to provide for the support of government.' (See: )].

"...[Thus,] The legal distinction between a 'fee' and a 'tax' can be complicated and depends largely on the context of the particular assessment [e.g., whether a fee is 'truly voluntary' - i.e., whether there exists a 'reasonable alternative']. Whether a particular assessment is statutorily referred to as a tax or a fee is never legally determinative. Instead, federal courts will examine the structure and the context of the assessment’s application." [SUCH DETERMINATIONS WILL REQUIRE A CASE-BY-CASE, 'FACTS & CIRCUMSTANCES' TEST].

...Agencies derive their authority to charge fees either from the Independent Offices Appropriation Act of 1952 (IOAA) (Title V of the Independent Offices Appropriation Act, 1952, Pub. L. No. 82-137, 65 Stat. 268, 290, known as the “IOAA” or the “User Charge Statute.”) or from specific statutory authority. IOAA provides broad authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. User fees assessed under IOAA authority must be (1) fair and (2) based on costs to the government, the value of the service or thing to the recipient, public policy or interest serviced, and other relevant facts. Fees collected under this authority are deposited in the general fund of the U.S. Treasury and are generally not available to the agency or the activity generating the fees.

Unless otherwise authorized by law, IOAA requires that agency regulations establishing a user fee are subject to policies prescribed by the President. OMB provides such guidance to executive branch agencies under this authority through Circular No. A-25.9. [See: ]. The Circular establishes federal guidelines regarding user fees assessed under the authority of IOAA and other statutes, including the scope and types of activities subject to user fees and the basis upon which the fees are set. It also provides guidance for executive branch agency implementation of fees and the disposition of collections. [OMB Circular No. A-25 does not apply to the activities of the legislative and judicial branches of government or to mixed ownership government corporations as defined by 31 U.S.C. § 9701].

In many instances, Congress has provided specific authority to federal agencies to assess user fees—in agency authorizing or appropriations legislation, for example. Legislation authorizing a user fee may enact a specified rate or amount to be assessed or may stipulate how the fee is to be calculated, such as a formula; the method and timing of collection; and the authorized uses of the fee collections, which may be broadly or narrowly defined. The amount of a fee may be set to partially or fully recover costs or may be set according to some other basis (e.g., market value). Specific authorizing statutes may even grant the agency broad discretion to set and revise fee rates without Congressional approval—that is, solely through the regulatory process—based on various factors. Specific user fee statutes should be construed consistent with IOAA and OMB Circular No. A-25 to the extent possible as part of an overall statutory scheme." [See: FEDERAL USER FEES: A Design Guide, Report to Congressional Requesters (GAO-08-386SP), United States Government Accountability Office (May 2008) at pp. 4-6, at: ].

[The GAO "assists Congress in carrying out its investigation and evaluation role." According to former GAO General Counsel, Anthony Gamboa, "a proposal ha[d] been made to change the name to 'General Accountability Office' in order to get away from the concept that the agency is only about accounting. The agency operates through teams that specialize in specific areas of government. Members of Congress ask the agency to investigate particular problems and the selected team relies on the General Counsel's office to provide legal support for the investigation. The agency also adjudicates government procurement disputes, rules on the propriety of appropriation requests and provides formal legal opinions to Congress." See: "GAO To Begin Recruiting At The College of Law", Sandra Day O'Connor College of Law, Arizona State University website at: . For a more detailed history surrounding the creation and role of the GAO, See: Walker v. Cheney, MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT, Civil Action No. 1:02CV00340 (JDB) (D.C. Cir. 2002), at: ;
GAO STATEMENT CONCERNING LITIGATION (Feb. 22, 2002) at: ; Walker v. Cheney, Civil Action No. 1:02CV00340, Complaint Filed in the U.S. District Court for the District of Columbia (Feb. 22, 2002) at:
The federal district court ultimately ruled against the GAO during 2003. See: "GAO PRESS STATEMENT ON WALKER v. CHENEY", (Feb. 7, 2003) at: ].


“When Congress authorizes a program or activity that will benefit private interests, it must also decide how to finance that program or activity. Basically, the choices are subsidization, user financing, or some combination of the two. Subsidization means funding the activity from appropriated funds, thus spreading the cost among all taxpayers. The user financing option involves some form of user charge or fee, under which part or all of the cost is borne by the recipients of the benefit. A user fee may be defined as ‘a price charged by a governmental agency for a service or product whose distribution it controls,’ or ‘any charge collected from recipients of Government goods, services, or other benefits not shared by the public.’

"We all pay a variety of user fees. When you buy postage stamps at your local post office, buy a fishing license, or pay highway tolls, you are paying a user fee. These common examples show some of the different types of user fees. You pay the toll only when you use the highway; if you never use the highway, you never need to pay the toll. Similarly, if you have no intention of going fishing, you don’t need to buy a fishing license. Once you buy the license, however, whether you ever use it or not is irrelevant to the issuing authority. You can use it as often as you like during the fishing season, but it becomes worthless once the season or specified time period is over, and even if you’ve never used it you can’t get your money back. You can use the postage stamp for its intended purpose, or you can save it. Although you can’t sell it back to the post office, it never loses its face value as long as it remains unused.

The advantages and disadvantages of user financing are much discussed and debated in the public financing literature. Supporters of user fees regard them as equitable because they place the economic burden on those receiving the benefit. They are also politically and 'budgetarily' attractive as an alternative to general tax increases. This was especially true during the budgetary shortfalls of the 1980s and early 1990s. CBO has noted that “[m]ost of the new and increased [user fee] charges of the 1980s followed the passage of the Balanced Budget Act of 1985. As the search for new sources of funds intensified, changes in law and budget processes helped assure the enactment of new user charges.” CBO, The Growth of Federal User Charges xi (August 1993). Moreover, the legal basis for setting user charges expanded from reimbursing an agency’s costs of providing services, to financing all or specified portions of the agency’s budget. Id.

While user fees at the federal level are not new, they received relatively little attention prior to the final third of the 20th century. In March 1980, GAO issued its report The Congress Should Consider Exploring Opportunities to Expand and Improve the Application of User Charges by Federal Agencies, GAO/PAD-80-25, the thrust of which is evident from its title. Page 1 of that report stated:

'Both individuals and businesses are concerned with tax burdens. Businesses are also concerned with the fact that compliance with Federal regulations is often expensive. Both concerns can be addressed by the Government’s promotion of economy and efficiency through actively employing user charges. [Footnote omitted.]

User charges can reduce Federal taxes, as well as the costs of certain types of regulation. They are a source of revenue that can partially replace general taxation of individuals and businesses. They also reduce the amount of taxes needed to finance the production of goods and the delivery of services to the extent that charging higher prices reduces recipient demand.'

In addition, GAO has issued a minor deluge of reports analyzing, and encouraging optimum use of, user fees in specific contexts. The fever spread to Congress generally as well as the Office of Management and Budget and the rest of the executive branch, with the result that the growth of user fees mushroomed. Between 1980 and 1991, CBO found, user charges increased by 54% in constant dollars, and financed much larger shares of many agencies’ budgets. CBO, Growth of Federal User Charges (1993). A later GAO report supports the notion that this trend continued during the 1990s, as many agencies became increasingly more reliant upon user fees, over general tax revenues, to fund their programs and operations, Federal User Fees: Budgetary Treatment, Status, and Emerging Management Issues, GAO/AIMD-98-11 (December 1997).

Political attractions aside, levying user fees is not simply a question of raising revenue, but can implicate a variety of other economic and public policy issues as well. For example, increasing a user fee can result in capital losses in the form of decreased asset values. This in turn raises questions as to the desirability of some form of compensation for these losses. A GAO analysis of these issues can be found in Congressional Attention Is Warranted When User Charges or Other Policy Changes Cause Capital Losses, GAO/PAD-83-10 (October 13, 1982). The case study presented in that report is the use of water in the Columbia Basin Project in the Pacific Northwest. The study showed that, if the price charged for water provided to farmers for irrigation purposes were raised to market levels, water would be diverted from farming to the production of electricity, and the value of farmland would drop significantly. (pp. 15-132 to 15-134)

In National Cable Television Ass’n v. United States, 415 U.S. 336 (1974), the Supreme Court distinguished two of them, fees and taxes. A fee is something you pay incident to a voluntary act on your part, for some benefit the government has bestowed or will bestow on you which is not shared by other members of society, examples being ‘a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station.’ Id. at 340. Taxes, on the other hand, need not be related to any specific benefits. Congress can take your money by taxation merely because you have it to be taken. Id. at 340-41. [In National Cable Television, the Supreme Court held that the IOAA authorizes fees but not taxes…After drawing the distinction noted above, the Court added that the primary measure of a fee under the IOAA is the ‘value to the recipient' standard of 31 U.S.C. § 9701(b)(2)(B). An attempt to recoup total cost would go beyond this by charging recipients for the public as well as private benefits of the FCC’s regulatory activities, which would at least arguably amount to levying a tax. Holding that the FCC could not do so, the Court considerably narrowed the scope of the IOAA, stating:

‘It would be such a sharp break with our traditions to conclude that Congress had bestowed on a federal agency the taxing power that we read [the IOAA] narrowly as authorizing not a ’tax’ but a ’fee’.’ 415 U.S. at 341.

By adopting this narrower interpretation, the Court was able to avoid having to directly confront the constitutional issue of the extent to which Congress could delegate its power to tax.

… On the same day it decided National Cable Television, the Court also decided the companion case of FPC v. New England Power Co., 415 U.S. 345 (1974), applying National Cable Television to invalidate annual assessments levied on pipeline companies by the Federal Power Commission. The Court agreed with the Court of Appeals for the District of Columbia Circuit (467 F.2d 425) that the IOAA does not authorize assessments on whole industries, but applies only with respect to 'specific charges for specific services to specific individuals or companies.' 415 U.S. at 349. The Court noted with approval portions of OMB Circular No. A-25, now found at sections 6 (agencies should assess user charges to “identifiable recipients” ),and 6a(4) (agencies should not assess fees “when the identification of the beneficiary is obscure”). This, said the Court, ‘is the proper construction of the [IOAA]’ and helps to restrain it from crossing the line into the realm of taxes. 415 U.S. at 351.

Notwithstanding overbroad language occasionally encountered in some lower court decisions, National Cable Television and New England Power do not stand for the proposition that Congress may not delegate the authority to assess charges which are more appropriately categorized as taxes. is now settled that Congress can do so as long as the statutory delegation is sufficiently explicit and provides intelligible guidelines. Rather, these cases hold merely that Congress did not do so in the IOAA.”


In order to assess fees under the IOAA, an agency must first issue regulations… A simple policy statement to the effect that fees will be charged for special services has been held too vague to support fee assessment…Rather, since rulemaking under the Administrative Procedure Act must provide the opportunity for public comment, the agency’s notice must include, or make available on request, a reasonable explanation of the basis for the proposed fee. This, one court has held, must be one that ‘the concerned public could understand.’ Engine Manufacturers Association v. EPA, 20 F.3d 1177, 1181 (D.C. Cir. 1994)… The Court of Appeals for the District of Columbia Circuit has also stressed the need for the agency to make a clear public statement of the basis for its fees so that a reviewing court can measure the agency’s action against the Supreme Court’s standards.

…The first step in establishing a fee or fee schedule under the IOAA is to ‘identify the activity which justifies each particular fee’ the agency wishes to assess… Thus, the threshold question is what kinds of government services or activities are regarded as conferring special benefits for purposes of the IOAA?...[In Ayuda, Inc. v. Attorney General, 848 F.2d 1297 1300 (D.C. Cir. 1988), the Court of Appeals for the District of Columbia Circuit had previously held that the] phrase should be construed broadly…this…is made clear by comparing the source language, 65 Stat. 290, which authorized fees for:

‘any work, service, publication, report, document, benefit, privilege, authority, use, franchise, license, permit, certificate, registration, or similar thing of value or utility performed, furnished, provided, granted, prepared, or issued by any Federal agency to or for any person (including groups, associations, organizations, partnerships corporations or businesses)…’

OMB Circular No. A-25, section 6a, provides further guidance.


…On the one hand, the mere fact of regulation is not enough to justify a fee…An agency may also charge a fee under the IOAA for services which assist regulated entities in complying with statutory duties…This is particularly true where the statute was enacted ‘in large measure for the benefit of the individuals, firms, or industry upon which the agency seeks to impose a fee’… Use of government property is another activity for which fees may be charged under the IOAA. A common example is the granting of a right-of-way over public lands…Information is certainly a ‘thing of value.’ Accordingly, the dissemination or distribution of information is another area subject to the IOAA to the extent not governed by some other statute such as the Freedom of Information ActAnother activity susceptible to IOAA fees is adjudicatory services by an administrative agency. The services may or may not be incident to a regulatory program. An example of the former is Federal Energy Regulatory Commission review of administrative appeals of remedial orders… An example of the latter is the range of adjudicatory services rendered to aliens by the Immigration and Naturalization Service.

Fees incident to litigation in the courts are also commonplace, but they implicate certain constitutional considerations and are prescribed under statutes other than the IOAA. See 28 U.S.C. §§ 1911 (Supreme Court), 1913 (courts of appeals), 1914 (district courts), 1926 (Court of Federal Claims), 1930 (bankruptcy fees). The rule is that, with the exception of certain indigent situations, reasonable fees may be charged to those seeking access to the courts…

Still another example is transportation services. Thus, if local services are not available, the National Park Service may provide transportation to injured or ill visitors in national parks, but should attempt to recover its costs under the IOAA.


[A]n attempt by a regulatory agency to recover its full operating costs would amount to charging the regulated entities for those portions of the program that benefit the public as a whole. This would go beyond the concept of a 'fee,' which is all the IOAA authorizes… Although the Supreme Court has not revisited the IOAA since its two 1974 decisions, two important principles have emerged from the body of lower court jurisprudence:

1. When establishing a fee for a specific benefit conferred on an identifiable beneficiary, the agency must exclude expenses incurred in serving some independent public interest.

2. Once it is established that a given activity confers a specific benefit on an identifiable beneficiary. The agency may charge its full costs of providing the service, regardless of the fact that the service may incidentally benefit the general public as well.


The agency must first separate its beneficiaries into ‘recipient classes’ (applicants, grantees, carriers, etc.), among which costs will be allocated. Each recipient class should be ‘the smallest unit that is practical’. The agency then proceeds to calculate the cost basis for each fee assessed against each recipient class. Full cost for purposes of the IOAA includes both direct and indirect costs… The agency is not required to calculate its costs with ‘scientific precision’… The final step is for the agency to ‘divide that cost among the members of the recipient class . . . in such a way as to assess each a fee which is roughly proportional to the ‘value’ which that member has thereby received’…The fee cannot exceed the agency’s cost of rendering the service…This is because the IOAA requires that the fee be based on both factors and that it be ‘fair.’ 31 U.S.C. §§ 9701(b)(1),(b)(2)(A) and (B).

…The D.C. Circuit, in a 1996 case, tried to simplify matters by stating that 'the measure of fees is the cost to the government of providing the service, not the intrinsic value of the service to the recipient,' but acknowledged that this would still be subject to the statutory fairness prescription… Thus, the agency must calculate its fee on the basis of its actual or estimated costs. Nonetheless, the law seems to require that ‘value to the recipient’ be taken into consideration… Applying these principles, assuming one could hypothesize a high cost but low-value service, the agency might well not be able to recover its full costs. Conversely, in a situation where the value to the recipient may substantially exceed the cost to the government, the agency will be able to recover its full costs but no more. It is improper, for example, to look to the value the recipient may derive from the service, such as anticipated profits….(‘In effect courts limit fees to either cost to the government or value to the beneficiary, whichever is lower’.) [See: Principles of Federal Appropriations Law, Second Edition, Vol. 4 (GAO-01-179SP), Office of the General Counsel, United States General Accounting Office (March 2001) at pp. 15-132 to 15-134, 15-137 to 15-150, at: ].

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