New England shows low use of user fees

Are Maine and the other New England states missing the boat when it comes to user fees?

A user fee is a payment for a specific government-provided service, such as garbage collection, turnpike tolls, higher education and hunting and fishing licenses.

According to an article in the latest edition of the “New England Economic Review,” New England relies less on user fees for state and local revenues than any other region of the country. Robert Tannenwald, an economist with the Federal Reserve Bank of Boston and author of “Taking Charge: Should New England Increase Its Reliance on User Charges?”, suggests that there are good reasons why New England states and towns make less frequent use of these fees than their counterparts in the rest of the country.

Nationwide, 22.2 percent of locally generated state- and local-government revenues come from user fees. In New England, the comparable figure is 15.8 percent. The figure for Maine is 15.6 percent.

Increased fees for government services have been an issue in Maine and other New England states as governments strive to balance their budgets in the face of a sluggish economy. But mention of such fees typically elicits a wave of critics claiming that the fees are no more than “hidden” taxes.

A proposal by the administration of Gov. John R. McKernan to charge applicants for state jobs a $5 fee was quickly withdrawn after the criticism appeared. In the town of Penobscot, a movement to do away with property taxes and to rely instead on user fees was easily rejected.

According to Tannenwald, local and state services can be divided into three groups, each with a different applicability to user fees:

Collective services: This category includes public health, police protection, corrections, the judicial system, public buildings and fire protection. Because everyone relies on these services, and they are used in a manner not of the consumer’s choosing, collective services are not good candidates for the use of user fees.

Private services: User fees are especially applicable to this group of services. These services include hospitals, water supply, gas supply, liquor stores and public welfare. In Maine and elsewhere, users and not general taxpayers often pay for these services. One exception is public welfare, as it would be self-defeating to ask welfare recipients to pay for the services.

Mixed services: These services provide both a public good and private benefits to their users. Examples include education, highways, air transportation, natural resources, parks and the provision of sewer services.

One reason, Tannenwald says, that New England has a low use of user fees is that the region spends a relatively large portion of its state and local revenues on public welfare and on collective services.

Tannenwald also says that New Englanders have a relatively strong incentive to rely on sources of state and local revenue that are deductible from federal taxable income. Taxes are deductible, fees aren’t. With relatively high incomes, New Englanders gain more by having the tax deduction than they would by having lower taxes and higher user fees, Tannenwald said.

By getting the tax break, New Englanders can “export” part of the public expense to taxpayers in other states, Tannenwald said. But user fees also can be a means of “exporting” the costs of services to people in other states.

For example, turnpike tolls provide money from out-of-staters to help defray the costs of Maine’s highway system. And non-resident hunting and fishing licenses help defray the costs of Maine’s warden service and wildlife programs.