New State-by-State Report: Understanding the Difference Between Taxes and Fees

March 28, 2013

This morning we released an extensive new state-by-state resource guide, How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees (download PDF version here). This report examines 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. Hundreds of relevant legal cases, from each state, are summarized.

A tax has the primary purpose of raising revenue. By contrast, a fee recoups the cost of providing a service from a beneficiary.

This is not just a matter of semantics. 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, which states have rejected the discredited notion that taxes are “mandatory” charges while fees are “voluntary” charges, and the impacts of the Supreme Court's decision finding the health care individual mandate to be a tax.

With April 15th arriving soon, taxes will be on the collective minds of our nation. 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 online.

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