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Setting the Record Straight on “Fees”

2 min readBy: Alan Cole

The House Committee on Budget released yesterday a brief FAQ “setting the record straight” on the recent bipartisan budget agreement. While the agreement raises no new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, it does raise fees of various sorts – for example, airport security fees and PBGC pension insurance premiums. The FAQ takes great care to assert that their fees are not, in fact, tax hikes in disguise.

Is the House Budget Committee right? Well, sort of. The committee’s explanation of the issue is very good – when government services are done only for a small group of people, it is usually bad policy to charge everyone for those services. This is where fees have a place in public policy. For example, it costs money to mail a package through the US Postal Service. The fact that the government provides a service does not mean it must necessarily provide it for free.

It’s easy to understand why security screenings and pension insurance should not be free. It is distortionary and unnecessary – and probably unfair – to deliver free services to those Americans lucky enough to fly or to have pension plans, just as it would be silly to deliver everyone’s packages around for free. These seem like good places to have fees for services.

But the critics have a point. Congress has played fast and loose with the definition of fees, and their fees have become very tax-like in intent. The “fees” adjusted in the budget agreement aren’t very clearly tied to the service they’re charged for. As the committee says, the fees aren’t commensurate in value to the service provided – and what’s more, they are used in the deal to “pay for” things in the general budget that might be completely unrelated to the service provided.

We outlined the difference between taxes and fees in a background paper earlier this year. A tax’s primary purpose is raising revenue, and a fee’s primary purpose is to charge people for services rendered to them. Given these understandings of what the words mean, critics have reasonable grounds to claim that in spirit, the deal still raises taxes.