What’s a tax, what’s a fee, and what’s just a shell game

According to the City Paper, the DC Council has removed the “streetlight fee,” and will find $12 million elsewhere. The “fee” would have charged electric customers a flat rate of $4.25 a month for residential customers, $16.75 a month for commercial customers, and $42 a month for others.

Good riddance. But another biggest reason to cheer the demise of this “fee” is that it sullied the name of all actual fees and set back efforts, here and elsewhere, to differentiate a “tax” from a “fee.” This “fee” was no fee; it was a simple unadorned regressive tax.

What’s the difference? A tax takes a cut of some other transaction for the purposes of raising revenue that’s not connected to the activity being taxed. A fee, on the other hand, is a charge connected to the actual direct governmental cost of the activity. For example, the sales tax doesn’t just recoup the city’s direct expenses that result from having sales take place. Revenue from the property tax funds a variety of programs, not just services to property owners. But if property owners paid a direct charge that went to trash collection from their property, we could call that a fee.

When the Virginia Supreme Court struck down the Northern Virginia transportation levy because it was a tax and not a fee, they wrote, “[W]hen the primary purpose of an enactment is to raise revenue, the enactment will be considered a tax, regardless of the name attached to the act….” This definition makes sense, most of all because charges designed to disincentivize a certain activity are fees, not taxes.

Readers debated whether the charge for plastic bags would be a fee or tax. It’s a fee. That’s because the purpose isn’t to raise revenue (despite what some argue). The purpose, instead, is to reduce bag trash. It’ll accomplish that in two ways. First, the revenue raised will go toward removing the bags from the river. And second, charging five cents will encourage people not to use disposable bags.

On a typical tax, if people stop performing the taxed activity, the government runs into trouble because the revenues go down. In a case such as this, it’s not a problem, because if people stop using the bags, then there will be fewer to clean up.

Many politicians avoid the word “tax” because of negative political connotations. That’s too bad, because income taxes are the fairest way to pay for many services. But from an economic standpoint, attaching fees to behaviors we want to discourage is a good strategy for altering behavior. That’s why a congestion fee is also a sensible fee (and not a tax). If such a charge reduced congestion by moving more people to more efficient modes of transportation or other hours of the day, that would accomplish the purpose of the fee.

The streetlight fee, however, is no fee. It’s clear purpose was to raise revenue. Moreover, it wasn’t even really a streetlight charge of any kind, but an electric bill tax. People paid regardless of how often they used the streetlights. Visitors to DC wouldn’t pay even though they used the streetlights. And as Notions Capital pointed out, blind people would still have to pay. If we added an income tax to buy textbooks for schoolchildren, we couldn’t just call it a “schoolbook fee”.

This electric bill charge was not the best way to raise revenue. It’s good that the Council killed it. But in addition, we’ve avoided setting a dangerous precedent of calling anything a “fee.” There are fees, and there are taxes. We should reserve the word “fee” for actual fees, like the plastic bag fee.