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New Fees in the Era of "No New Taxes"

January 15, 2009 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

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During the era of "no new taxes," Minnesota is primarily addressing rising budget shortfalls by cutting much-needed aid to local governments and jacking up regressive fees on Minnesota families. Relying on these policies alone to resolve the $5.5 billion deficit would have disastrous repercussions for our state.

Minnesota Fees Jump During Past Five Years
A fee is a payment to use a particular good or service.  While the difference between a fee and a tax is not always clear, one distinction between the two is that a person opts to pay a fee, but must pay a tax. As used in this report, "fees" include fees, charges, and post-secondary tuition

From fiscal year (FY) 2003 to FY 2008, real (i.e. inflation-adjusted) per capita state fees increased by 20.8 percent.  In other words, growth in state fees has exceeded both inflation and population growth by nearly 21 percent.

Based on projections for FY 2009, real per capita state fees have increased by 19.1% from FY 2003 to FY 2009. Because state tax revenue is more than seven times greater than state fee revenue, a 19.1 percent increase in fees is no where near enough to make up for a 13.0 percent decline in taxes, so total state own-source revenue (i.e., all state revenue generated by the state excluding federal aid) is down 9 percent.

Most importantly, the increase in state fees has financial implications for the typical Minnesotan.

  • Getting married?  Congratulations. That marriage license will cost you $110-$40 (57 percent) more than six years ago.
  • Lose that birth record?  In 2003 it would have cost you $20 to get it replaced.  Today it will cost you double.
  • Going pheasant hunting?  Good luck.  Your pheasant stamp will cost $7.50-50 percent more than six years ago.

Each of these fees has one thing in common: the increase is much higher than inflation.  While some fee increases may be necessary to pay for increased costs, it is clear that fee increases are also being used to back fill a hole in the state budget.

Fees are Regressive

Minnesota's revenue system has become regressive, meaning lower-income households pay a larger percentage of their income in taxes than do higher income households.  Regressivity in Minnesota's tax system increased from 2002 to 2004 and is projected to increase again by 2009.

According to the Internal Revenue Service, fees are "considered regressive because they take a larger percentage of income from low-income groups than from high-income groups."  There can be no doubt that Minnesota's increased dependence on fees has shifted more costs to those with the least ability to pay.

Fees Can't Replace Tax Revenue

Total FY 2008 state fee revenue-including post secondary tuition-was $2.44 billion.  The state is projected to collect $17.5 billion in taxes, seven times greater than fee revenue.

Since fees are a smaller revenue source, fee increases cannot replace massive drops in tax revenue.  This is one of the reasons why total real per capita state revenue declined by 5.9 percent from FY 2003 to FY 2008, with another large reduction anticipated for FY 2009.  Over-reliance on fees is a recipe for large scale decline in public investment, which is precisely what we have seen over the last six years.

Discouraging Higher Education

Fees can be attractive because they tend to discourage consumption of public services.  However, there is one public good that we do not want to discourage: higher education.

Post-secondary tuition is one type of fee that has grown rapidly in recent years.  State revenue generated from tuition has increased by 22.3 percent from FY 2003 to FY 2008 in inflation-adjusted dollars per capita.
A recent Growth & Justice report notes, "At the current rate we are producing students with post-secondary degrees, within two decades Minnesota will not have enough skilled working adults to sustain our economy or quality of life at the levels most of us have enjoyed."  The National Center for Public Policy and Higher Education concludes that "colleges and universities in Minnesota have become less affordable for students and their families.  If the state's downward trends are not addressed, they could limit its access to a competitive workforce and weaken its economy over time."

The recent trend toward escalating tuition is likely undermining the Minnesota's long-term economic vitality and competitiveness.

A Balanced Approach

Fees play an important role in financing government.  There is something intuitively appealing about requiring those who benefit from particular public goods and services to cover the costs through a fee.  However, Minnesota's recent fee increases frequently have fallen outside of what would be considered good public policy.

Ronald Reagan once said that another way to spell fee is "T-A-X."  While the 40th president was oversimplifying, this comment is apropos in Minnesota today.  In order to satisfy political objectives, revenue enhancements that would ordinarily have been considered a "tax increase" have been reframed as a "fee increase." A prime example was the 2005 "health impact fee," which is broadly considered to be a defacto tax.

During the 2009 legislative session, the state will be confronting a massive $5.5 billion dollar deficit for FY 2010 through FY 2011.  In dealing with this revenue shortfall, state policymakers have two options.  Continuing policies of the last six years, balancing the state budget through a combination of painful budget cuts and fee increases, would be a recipe for disaster.  A more progressive approach would be to rely on a balanced mix of spending reductions, revenue increases, and-where appropriate-fee increases. 

Any new fee increases in this year's budget solution must be implemented with transparency, with the goal of mitigating their regressivity and other harmful side effects.

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