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Taxes vs. Fees: What’s the Difference Between Bananas and Driver’s Licenses?

2 min readBy: Matt Moon

More on distinguishing between taxes and fees

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. Foundation staff economist Josh Barro answers that question in a New York Times story last Friday by David Segal on cities turning to “fees” to fill budget gaps:

Politicians tend to regard fees as more palatable than taxes, and more focused too. If a state needs to finance an infrastructure to oversee fishing, why shouldn’t fishermen foot the bill? But groups like the nonpartisan Tax Foundation in Washington worry that governments are now using fees to shore up budget shortfalls rather than cover specific costs incurred by specific users.

“When it comes to paying for bananas, you’ve got the market as a mechanism to make sure you’re paying a fair price,” says Josh Barro, a staff economist at the Tax Foundation. “But when it comes to getting your driver’s license renewed, the government has a monopoly, and you have no idea what it costs the state or what it’s doing with the money.”

Many states and cities limit tax increases via legislation and/or constitutional amendment. In an effort to avoid these limitations, lawmakers are playing political semantics between what a “tax” is and a “fee” is. Any assessment that raises money in excess of what is needed to defray costs is a tax.

As Josh has previously stated in an analysis of Gov. David Paterson’s original fiscal plan in New York: “A fee increase is appropriate if it is needed to keep up with the cost of the service provided for the fee, but not if it is diverted to provide general revenue.” Just recently, Tax counsel Joseph Henchman submitted a friend-of-the-court brief to the California Court of Appeal in Weisblat vs. San Diego, arguing that charging taxpayers for tax collection is a tax, not a fee.

Visit our Center for State Fiscal Policy for the latest news on state and local taxes. Visit our Center for Legal Reform for more on tax law.