Taxes and Fees: A Lawyer’s Response

My colleague Gerald Prante is doing a back-and-forth series of posts recently about taxes and fees with the folks over at TaxVox. The TaxVox people have written that the individual health mandate is nebulously neither a tax nor a fee (although everything they list points towards taxes, including “fine[s] for failing to meet a public responsibility” which they weirdly list as fee-like). They conclude by saying that it doesn’t matter; people should just decide whether the mandate is good policy on its merits.

Prante rises to defend his lawyer colleague (yours truly) and the work the Tax Foundation does on tax/fee distinctions. The difference between taxes and fees matters for state constitutional and legal requirements, he concedes. But he seems to suggest that it doesn’t matter beyond that, aside from (to him) some bewildering political concern with being labeled a tax raiser.

People should care about the difference between taxes and fees, and for more than esoteric legal reasons. Fees are what government collects for services provided to particularized users and are the best example of the “benefit principle” of giving money to the government in return for services. Taxes go into the general pot and pay for services for everyone notwithstanding ability to pay. They’re not just different labels for otherwise identical revenue categories, but rather represent two different models for government, working side-by-side.

I don’t know whether revenue has the same impact on prices and behavior, whether it’s called a tax or a fee. But I do know that calling the mandate a “fee” implies some services that the payor will be getting, while calling it a “tax” means that it’s a public service for everyone. For that reason, I share Gerald’s wonder at why Obama and TaxVox etc. don’t just call it a tax or a fine. President Obama does in a way, with his reference to requiring individuals to buy auto insurance. The people who don’t (and there are a lot) pay criminal fines if they break that law.