Fee Services and the Private Sector Model

Often times during public hearings a Council member will opine that fees are the same as taxes.  I then feel the need to offer a technical explanation of the difference between fees and taxes, often invoking Proposition 4 and the State Constitution.  I have found that this procedural explanation rarely changes anyone’s mind. But what that Council member is really saying is that all payments to government are the same.  I believe this is because there is a disconnection between what is paid to government and what is received from government.

Through the use of fees for services, local government is able to act like the private sector.  This is where it needs to be made clear that service fees are an attempt to directly tie money paid to services received.  Let’s face it, for most services that local governments provide there is not that direct link.  A city is unlikely to charge for a police officer’s response to a robbery, or a fire fighter’s response to a fire, or for a citizen to drive on a well-maintained city street.  While there are pricing options available for many of these things, such as paramedic subscription fees or toll road fees, the usual revenues paid for these services (taxes) tend to act more like an insurance policy in which you pay one day but may not receive the use of that service until another day.  Also, most importantly, the amount you pay in taxes is not directly tied to how often or how much you use those services.

But, by charging the full costs of services when a customer receives a particular service allows market forces to act.  For development-related services in which the customer has to pay for the service if they want to do certain things with their property, there is direct feedback from the applicant about the quality and timeliness of the service.  For recreation services in which the customer can choose not to purchase a service like a recreation class, the feedback is provided directly by attendance in the classes and whether or not there are waiting lists for particular classes.

In short, the use of fees for certain “personal choice” services is the clearest way to allow market forces to have a voice in which services should be provided and at what level.  If everything is paid by taxes where there is no direct connection between the tax payment and the use of a tax service, there is no incentive to provide quality service in an efficient manner.  That important customer feedback is lost because the customer is flying blind as to what the service they are receiving is really worth.

Therefore, service fees are an important tool that local governments can use to tap into the power of the private sector.