ees and charges, licenses (other than local business licenses and franchise fees), and permits have become an increasingly important source of state and local government revenue in South Carolina in the last decade. This group of revenue sources is extremely diverse, including motor vehicle license plates and drivers’ licenses, entrance fees for state parks, revenue from parking meters and building permits, local waste disposal and recreation fees, a scattering of highway tolls, tuition at state colleges and universities, building inspection fees, and development impact fees at the local level. 

OVERVIEW OF FEES AND CHARGES

Fees and charges of various kinds provided 17% of state own-source revenue and 22% of local own-source revenue in South Carolina in FY 1998.² Within local governments, fees and charges provided 47% of municipal revenue, 28% of county revenue, and only 7.5% of school district revenue. Municipalities in particular provide services on a fee-for-service basis to a larger degree than any other kind of government.  Figure 1 summarizes the total and per capita revenue from this source at each level of government.

FIGURE 1
Revenue from Fees and Charges

For municipalities, major sources of fees and charges were waste disposal, law enforcement, fire protection, recreation and impact fees, and building permits.³  Counties receive relatively little revenue from licenses and permits, but rely heavily on service charges for sewer service, landfill use, fire protection, and other services provided at least partly on a fee basis. School districts are relatively new to the fee business (except for school lunches and field trips), but some 60 of the state’s 83 school districts have been authorized by the legislature to charge matriculation or other incidental fees, and only one school district is authorized to charge school impact fees.  State revenue from fees and charges comes primarily from licenses, permits, fines and penalties.

Reliance on fees and charges has increased across the country in the 1990s.  Many states have increased the use of fees and charges in order to provide property tax relief, to rebalance the revenue portfolio, and to make a clearer link in some cases between payments made and services received by the individual citizen.   Figure 2 compares growth of per capita revenue from service charges, licenses, and permits to total revenue for the state and for cities, counties, and school districts in South Carolina between FY 1991 and FY 1998 (for the state, FY 1989-99). While school districts made limited use of fees and charges, all other governments saw faster growth of fees and charges than other kinds of revenue.

FIGURE 2
Growth of Per Capita Revenue from Fees and Charges

Figure 3 compares South Carolina to other southeastern states and the U.S. average in FY 1999 in fees and charges both per capita and as a percent of revenue. South Carolina is above the average and at the top among southeastern states in per capita state and local fees and charges (which includes tuition at state colleges and fees at public hospitals as well as those fees that go into the general fund) and behind only Alabama and Mississippi in fees and charges as a percent of general revenue.

FIGURE 3
State and Local Revenue from Fees and Charges,
Fiscal Year 1999

FEES OR TAXES?

The difference between a tax and a fee or charge is not always clear.  A tax in its pure form is paid by citizens based on some criterion such as income, assets, or consumption spending in general or for particular items.  There is no connection between the tax paid and the taxpayer’s use of any particular public service.  A fee in its pure form is a business transaction, a quid pro quo, between a government and a resident in which one receives a specific service in exchange for voluntary payment.  Those who do not choose to use the service do not normally pay.  But there are many payments to government that fall into a gray area.  For example, the fee charged for a driver’s license is a fee rather than a tax because one voluntarily chooses to apply for a driver’s license, and those who do not drive do not have to pay.  But the revenue goes into the general fund and does not fund any specific services in exchange.  The gasoline tax, on the other hand, is clearly a tax just like the tax on tobacco and alcohol. The revenue in this case, however, goes into the state’s highway fund (in South Carolina) and is used to maintain the roads used by buyers of gasoline.  Why? The more gasoline people buy, the more wear and tear they create on the roads, either because they drive a lot of miles or because they drive heavy, gas-guzzling vehicles. 

Further complicating the distinction between taxes and fees is the fact that many government services rely on a mixture of general revenue (tax) financing and fees. Most local recreation programs rely, for example, on both sources. Higher education is paid for partly out of tuition and partly through general tax revenue from the state.  Public education is mainly tax-financed but even there parents have to pay some fees and charges, including the cost of school lunches. A local impact fee, which is charged for new development to cover the additional cost of local services to those new homes and businesses, also lies somewhere in that intermediate area between a fee and a tax. 

This article follows conventional distinctions between taxes and fees for the most part.  The gasoline tax is a tax, because it is charged on a purchase based on volume, and the charge for a car tag and a driver’s license is a fee, because it is voluntary and involves something of a fee for a privilege.  The main exception is that business licenses and franchise charges are treated as business taxes rather than fees and charges.

IMPACT FEES            

One kind of fee that has been seeing increased use in South Carolina is the impact fee, used primarily by municipalities.⁴  While it is widely believed that new development of any kind will spread the tax burden among more taxpayers and reduce tax burdens, experience suggests that the opposite is true.  Particularly in the case of residential development, new construction may increase demand for infrastructure and services by more than it adds to local revenue.  To protect established residents from higher tax burdens, impact fees on new developments are used to cover the additional cost of providing necessary infrastructure and services. State regulations specify the kinds of fees that can be charged and the purposes for which they can be used.  In FY 2000, municipalities generated about $12 million in impact fees.

WHY FEES AND CHARGES?

Governments undertake a great array of activities for a variety of reasons.  Some activities of government benefit most citizens, so those who benefit cannot easily be singled out and charged in proportion to their benefits.  For instance, local police protection and street lights fall into this category. Other services of government clearly benefit specific individuals who can and should be charged just as if they were making purchases from a private business.  Municipal electric utilities, public golf courses and marinas, and parking spaces all fit into this category. In fact, a fee will discourage people from demanding too much of these services.  There also tends to be less citizen hostility toward paying a specific fee for a specific service than paying taxes that go into a general fund not tied to a particular service.

Most government services, however, fall somewhere between these two extremes.  They benefit some individuals more than others.  They are consumed by both those able to pay and those unable to pay.  Roads, fire protection, public recreation, education at all levels, waste collection and disposal are among the many kinds of services that fall in this middle category.  Financing such services solely out of taxes would represent an unfair distribution of the burden between those who use a lot and those who use little or none of these services.  Financing solely out of fees and charges would result in producing too little of the service (because the price would not reflect the public benefits) and would be burdensome on the poor.  So governments at all levels use a mixture of taxes and fees or charges.  Some spending is financed solely out of taxes, some solely by fees, but a great many government services are financed by a combination of the two.

In addition, the use of fees and charges permits local governments to generate revenue from tax-exempt entities that use public services but are not required to pay taxes.  Schools, churches, private and public colleges, and state agencies generate service demands for fire and police protection, street maintenance, and trash disposal.  Fees allow local governments to recover some of the cost of serving these institutions.

DISTRIBUTION OF THE BURDEN

The burden of fees and charges fall on those who choose to consume the particular service.  This distribution has a certain fairness appeal.  It is hard to avoid most taxes, but there seems to be an element of choice with fees and charges.  You can choose to park downtown, use a public park, attend a public college, or buy a hunting license.  But in fact many of these fees do not involve a choice, particularly at the local level.  In many cities, every household in the city pays a recreation fee or a solid waste collection fee, regardless of whether they use public recreation or how much volume of solid waste they generate.  Such flat fees represent a greater burden on the poor, because they are a higher percentage of their income.  In addition, the poor are more likely to use public services such as public recreation and parks, rather than private facilities.  So they will pay a larger share of their income in fees than higher income households that belong to private clubs or have recreation within their neighborhood association.  It is more likely to be lower income households that pay $2 to use a public recreation area because they cannot afford lakefront property and do not belong to a country club or a pool association.

Not all fees fall heavily on lower income households.  Impact fees on new development actually provide tax relief for established citizens, poor and non-poor, while impacting on new construction that tends to be for middle and higher income households.⁵ But in relying more heavily on fees and charges, governments are moving away from a concept of shared consumption of public services regardless of ability to pay toward a more market-driven, “user pays” model.  This shift has a tendency to make lower-income families pay a larger share of the cost of government services than would be true with tax financing.

CONCLUSION: STRENGTHS AND WEAKNESSES            

South Carolina, like other states, has increased its reliance on fees and charges as a revenue source, in recognition of the spectrum of government activities that range from broad general benefits to specific benefits to identifiable residents.  Among local fees that have increased in the last decade are impact fees, solid waste fees, and recreation fees.  The state now relies more heavily on fees to finance parks and recreation and has increased fees for other services.  There are some warning signals in comparative data that suggest South Carolina may have gone beyond the optimal level of reliance on fees and charges.  Each fee needs to be reviewed regularly for its appropriateness, its relationship to cost of services, and its effect on access and equity.  There is an elusive and shifting balance between tax financing and fees and charges that must be constantly fine-tuned in order to reflect the goals of adequacy, equity, and efficiency in paying for public services.

NOTES

¹Local business licenses, as well as state business licenses, are more properly classed as a business income tax.

²This figure from Census data includes business licenses and franchise fees, which the author is treating as business taxes rather than fees and charges.

³South Carolina municipalities and counties also derive substantial revenue from local enterprises, primarily utilities—water, sewer, electric power, natural gas, and transit systems.  Charges for these services are also classed as fees and charges, but are accounted for separately in enterprise funds and are not a part of the general fund. However, some local governments subsidize their utility enterprises, and others transfer surpluses from these enterprises to the general fund to subsidize their day-to-day operations.

⁴Some counties also use impact fees, and a few school districts are authorized to charge them as well.

⁵To the extent that impact fees raise the cost of construction and discourage building low to moderate priced housing and drive up rentals, they do impact indirectly on the poor.

ABOUT THE AUTHOR

Dr. Holley Hewitt Ulbrich, Ph.D., is a senior fellow with both Clemson University’s Strom Thurmond Institute of Government and Public Affairs and the University of South Carolina’s Institute for Public Service and Policy Research. Dr. Ulbrich has over 30 years of experience in working with issues pertaining to taxation and public revenue. She is nationally recognized in her field of expertise and has authored numerous articles and books on public fiscal policy and practice. Dr. Ulbrich can be contacted at holleyu@earthlink.net.