Understanding the Difference between Taxes and Fees

March 28, 2013

Washington, DC, March 28, 2013—In a new Background Paper released this week by the Tax Foundation, How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees examines state-by-state what a tax is, what a fee is, and how public understanding of the difference between the two can strengthen taxpayer protection provisions, minimize distortions caused by hidden or mislabeled taxes, and help increase transparency of the cost of government programs.

“A tax has the primary purpose of raising revenue,” said Joseph Henchman, Tax Foundation Vice President of Legal Projects, and author of the exhaustive study. “By contrast, a fee recoups the cost of providing a service from a beneficiary.”

“This is not just a matter of semantics,” Henchman added. “In order to protect taxpayers, many state constitutions contain additional procedural steps and limitations that apply only to tax increases. These protective measures can be undermined if the legislature can circumvent them by merely relabeling what would otherwise be a tax, so a workable definition of ‘tax’ is necessary to give them meaning.”

The report finds that all but two states (North Carolina and Oregon) have adopted these definitions, with Ohio as the most recent addition. The report also reviews which states rule in favor of taxpayers when tax laws are ambiguously worded, and which states have rejected the discredited notion that taxes are “mandatory” charges while fees are “voluntary” charges.

“With April 15th arriving soon, taxes will be on the collective minds of our nation,” said Tax Foundation President Scott A. Hodge. “As taxpayers sign over checks to the government, an understanding of what the word ‘tax’ means is of upmost importance.”

Tax Foundation Background Paper No. 63, “How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees” by Joseph Henchman is available here.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask