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

Government

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

by David Alpert • April 28, 2009 3:02 pm

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.

Photo by Bill on Capitol Hill.

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.

22 comments

Tags: bag fees, DC, DC Council, taxes

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David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater.

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Blind people do use streetlights. Streetlights increase visibility and make it safer to cross the street whether or not you can see.

by dd on Apr 28, 2009 3:14 pm • link • report

I'd argue it boils down to this:

A fee is something you can avoid.

A tax is something you cannot avoid.

I have a choice whether to use a bag and thus can avoid the fee.

If the streetlight "fee" had gone forward, I don't think I could have requested the city to turn it off when I wasn't using it.

by also... on Apr 28, 2009 3:51 pm • link • report

David,

The bag charge is still a tax, just of the pigouvian variety. A fee, as you rightly stated is "a charge connected to the actual direct governmental cost of the activity." Or as the article you quoted said, "The converse of that is that when the primary purpose of an enactment is to offset the cost of providing a service, it is a fee."

You misconstrued the Court's definition as meaning any program that isn't set up primarily to raise revenue is a fee. This isn't what the Court said. If the charge for bags was only applied to people who, in fact, threw them in the river, the it would be a fee. This is not the case. In actuality it is a charge designed to correct a market failure or externality, which by definition is a pigovian tax.

by Local on Apr 28, 2009 4:02 pm • link • report

A fee is something you can avoid.

A tax is something you cannot avoid.

That's not really a perfect definition. You can avoid a sales tax by simply not buying something. You avoid an income tax by taking a job with less money (or not working at all).

The distinction you seem to be getting at is that a fee is something that attaches to "optional" behavior. So, yes, it is something you can avoid. But only in as much as the behavior is actually optional. Similarly, a tax is unavoidable only to the extent that the "normal" behavior is actually non-optional.

by Reid on Apr 28, 2009 4:03 pm • link • report

Not an expert on this area, but not sure I follow your definition of a fee. You first talk about fees as a "charge connected to the actual direct governmental cost of the activity," as with a trash collection fee. You then talk about fees as "charges designed to disincentivize a certain activity," as with the bag fee. Obviously, these are two very differt definitions. Are you saying fees are both of these, whereas taxes are solely revenue-based?

I think i like your first definition, but not sure about the second. There are many, many taxes that involve incentives (e.g, gas taxes, cigarette taxes) that no one calls "fees." Also, every tax and every fee raises revenue in some sense, and the "purpose" of a tax/fee is generally about both incentives AND revenue. The ongoing national debate about an income-based versus a consumption-based tax is obviously about incentives, but it is also about how the government should raise revenue.

Anyway, hope you might clarify.

by Will on Apr 28, 2009 4:05 pm • link • report

The bag "tax" may not be a tax, but it's not a fee, since the government is not selling (or providing) the bag.

"Also..." I don't understand that distinction. One can avoid a tax by not engaging in the taxed activity, be it owning property, engaging in sales transactions, not earning income, etc.

A fee is a charge for services provided by the government (directly or indirectly). One can avoid it by opting not to purchase the service through payment of the fee.

A tax is an assessment by a government upon some sort of activity or status without a corresponding direct benefit (indirect, yes, through the provision of services).

by ah on Apr 28, 2009 4:06 pm • link • report

BTW, the bag tax/fee/charge also qualifies under the Virginia definition of a "tax",* as it is designed to fund the Anacostia river cleanup. It's primary purpose is to generate revenue for that. It has a benefit (it is argued) of discouraging the use of plastic bags. If its true purpose were to do only that, then any revenue raised should be put into the general fund, or simply discarded.

*It's also rather risky to rely upon a Virginia court definition that was described in order to determine whether certain motor vehicle taxes/fees were adopted pursuant to the process required by Virginia law.

by ah on Apr 28, 2009 4:11 pm • link • report

Let me once again say that from an economic perspective, what you call it really doesn't matter. It is an additional cost of consumption, no more no less.

Coming up with a name for it is irrelevant and plain semantics, so I suppose that's why politicians love doing just that.

by MPC on Apr 28, 2009 4:13 pm • link • report

i'm with MPC on this one - what you call it seems to be pointless. (David - your attempts at definitions immediately made me wonder what you'd call the federal and state cigarette taxes. some states use them to raise revenue and reduce consumption. others, just to raise revenue. at what point does something cease to be a tax and become a fee?)

by AJ on Apr 28, 2009 4:30 pm • link • report

The semantics matter to voters, who have different reactions to the word "tax" and the word "fee"

by ah on Apr 28, 2009 4:31 pm • link • report

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.

Using this definition, if the DC government set the fee to equal what they pay PEPCo each month for operating and maintenance of streetlights, would it then be a "fee"? If what the DC government charges for a drivers license is more than what it costs to produce the license, is it then a "tax"?

There is no consistent definition of "fee" vs "tax," but a tax is usually an amount collected to provide services of benefit to the public as a whole that may or may not be related to the transaction, whereas a fee is attached to a transaction where the government provides a private service.

In the case of street lights and plastic shopping bags, I would come down on the side of calling them taxes, because the government is not providing a private benefit directly related to the charge. The benefits are to the public generally.

by Stanton Park on Apr 28, 2009 4:48 pm • link • report

Does DC get greater depending on whether it taxes or fees its citizens? No, it doesn't. DC gets greater by spending its revenue wisely.

by Jasper on Apr 28, 2009 5:10 pm • link • report

The semantics matter to voters, who have different reactions to the word "tax" and the word "fee"

Who cares about the voters. They're stupid anyways.

After all, aren't we all elites on here?

by MPC on Apr 28, 2009 6:25 pm • link • report

OK, I get it. Taxes are additional money the government charges for things GGW doesn't like, but fees are additional money the government charges for things GGW DOES like.

All pigs are equal.

by charlie on Apr 28, 2009 9:32 pm • link • report

MPC, if voters are stupid and elites are voters...then elites are stupid voters? Voters are stupid elites? Stupidos are elite voters?

by Bianchi on Apr 28, 2009 11:53 pm • link • report

Your conclusion on your first syllogism was fine, but it falls apart from there.

The point I was trying to make is that I found it surprising that someone appealed to the sentiments of the electorate, since most of the content on this blog does not sympathize with that position. Rather, GGW supports, in general, dictating how policy ought to be, from a top down approach, and imposing it on the electorate.

That is why you see more topics on this blog addressed towards schmoozing with the well-connected at highbrow dinner parties (Gabe Klein) than instances of the author going into Anacosita and finding out what the people need.

by MPC on Apr 29, 2009 1:12 am • link • report

Dave, if you read the bag tax bill, the tax revenues will pay for reusable bags for the poor and consumer education, not for cleanup of the Anacostia River. So you've got that one wrong.

I wonder what you mean by a "congestion fee." Public transportation in D.C. is incovenient and expensive. And do you really think schools and businesses will change their hours?

I guess if you like it, it's a fee; if you don't, it's a tax.

by MAF on Apr 29, 2009 10:12 am • link • report

So MPC, you don't like contrarian positions that actually acknowledge the reality of electoral politics? ;)

It's wonderful to talk about high-minded policies, but is banging one's head against the wall much less painful than being hit by careless drivers?

by ah on Apr 29, 2009 10:19 am • link • report

Perhaps "fee" once had more positive connotations than "tax," but no longer.

When I hear "fee" I think "phone activation fee" ($20 for typing my name and address into a computer? I want that job if that's the hourly rate!), "ATM fee," "account maintenance fee," "move-in fee," "convenience fee" for Ticketmaster purchases when there is no other option convenient or otherwise.

In short, "fee" translates to being charged 100 times the actual additional cost of whatever fig leaf some company is putting forth to pretend they're not just gouging me because they can. It no longer sounds benign to me. At least "tax" is honest.

by Erica on Apr 29, 2009 11:04 pm • link • report

Erica, I couldn't agree with you more!

I have nothing against real fees such as water usage fees ... based on consumption of a government provided service. But when the word "fee" starts getting used to actually provide funding to accomplish someone's (or some group's) social goals, then I consider it a hidden tax. A tax that the powers that be know wouldn't pass the scrutiny of the electorate ... and so gets masquared as a "fee" for something the government never provided .... and the person being "taxed" never got. It's truly a "tax" ... but without all the niceties (and protections) that come with something called a tax. It's simply put: "unethical".

by Lance on Apr 30, 2009 1:02 am • link • report

Well I'm positive that the DC government would never want to come across as unethical.

I'll concede that word usage does matter in politics, but I'm surprised that there is much outrage on the part of Lance, Erica, etc.

It's no secret that governments do everything they can to convince people that their tax burden is low. I could list tons of examples, such as tax withholding. But I think at this point, my skills as an economic geographer aren't too useful, and the discussion has ventured to linguistics.

by MPC on Apr 30, 2009 1:31 am • link • report

The bag 'tax' is a pigouvian tax, designed to reduce an externality by punishing users, not a fee designed to pay part of the costs associated with the product/service provided on a per use basis. It is partly about where the money goes, but also partly aboutof why it is levied. I just don't think you can spin the bag 'tax' as a fee since you aren't paying for provision, but rather for priviledge, whereas ATM fees you are paying for provision, though most is going to servicing the fixed cost of installing the system, not the per use cost of operation.

by CP on Apr 12, 2010 10:44 pm • link • report