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States Find Way Around Tax Hikes with ‘Fees’

Date: August 18, 2003

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Nevada's brothel owners are ponying up. So are snowmobilers in North Dakota, riverboat casino owners in Illinois and divorcees in New Jersey. Cruise ship travelers in Alaska and criminal suspects in Florida might be next in line.

 

What these disparate groups have in common is that they have become state governments' covert solution to unprecedented budget crises sweeping state capitols across America. With large-scale tax increases having become politically verboten, fees have become a favorite fix for tapped-out state treasuries.

 

A recent survey by the National Conference of State Legislatures found that 31 states this year have raised more than $2.7 billion in new revenue through higher or new fees. Last year, fees raised only $926 million; in 2001 it was $405 million.

 

"Due to the unpopularity of tax increases and the ongoing budget shortfalls in most states, more and more emphasis has shifted to fees," the report states.

 

Fees have not replaced taxes as a source of new revenue for cash-strapped states: The conference found states raised taxes a total of $6.9 billion this year. But this year's total fee increases are expected to raise more money than income and corporate tax increases combined, according to the group.

 

Republicans have been so successful at creating an antagonistic climate toward increases in broad-based taxes that politicians like New Jersey Gov. James E. McGreevey are loath to raise levies like income or sales taxes. Fees usually are less noticeable, and they are everywhere.

 

Nick Jenny, senior policy analyst at the Nelson A. Rockefeller Institute of Government in Albany, N.Y., said fees are "generally seen as being a little bit safer" than taxes. "There are no anti-fee groups out there. It runs a little bit under the radar," he said.

 

The most common subjects of fees have been motor vehicle and judicial services, recreation and health care. But with state budgets in their worst shape since World War II, state treasurers are looking far and wide for new targets.

 

The most unorthodox may be Nevada's brothels. With no state income tax and a dire fiscal outlook this year, Nevada passed legislation for a 10 percent "live entertainment" surcharge on live concerts, strip bars and its two or three largest houses of prostitution.

 

Legislators said last-minute confusion led to an exemption for smaller brothels, and vowed they be required to pay next year. The new fee applies to admissions, drinks and merchandise sold by the establishments.

 

Fees aren't just going up in Nevada. With a reported $500 million in fee increases, the most of any state, Massachusetts even hiked fees on skating rinks. North Carolina increased the fee charged to local health departments for processing pap smears. Illinois is nicking drivers an extra $1.50 when people buy new tires.

 

Florida raised fees on traffic violations, hunting licenses for out-of-state residents, and even autopsies of dead cows. At least for now, its lawmakers are holding off on Gov. Jeb Bush's plan to make suspected criminals pay a 2 percent surcharge on any court-ordered bail. A proposal to make cruise ship passengers pay a $100 fee is expected to go before Alaska voters next year.

 

In New Jersey, Gov. James E. McGreevey's 2004 budget raised taxes and fees by about $600 million. Of that, $111 million came from fee increases, including higher charges for court documents filed by divorcees, license fees paid by realty agents and brewery owners, and a new fee on billboard owners.

 

Treasury justified many of the fees by saying they were low compared to those charged in other states, or that they hadn't been raised in many years. Advocates of fees contend they are fair because they make users of services like parks or motor vehicle agencies bear the most cost.

 

Opponents, like Sen. Leonard Lance (R-Hunterdon), view them as an additional drain on the wallets of already over-burdened taxpayers. He said they are just as objectionable as cigarette, casino and hotel motel taxes that were also enacted in New Jersey this year to help ward off a projected $5 billion budget deficit. "Do you want to know how I spell 'fee'? T-A-X."

 

The Center for Budget and Policy Priorities, a liberal think tank that often finds itself on the opposite side of conservative groups like Americans for Tax Reform, shares that group's disdain for fees because they take an extra toll on lower-income taxpayers.

 

Jenny said that from an economist's standpoint, there is little distinction between taxes and fees. "Essentially, they are both just ways of raising money," he said.

 

In the National Conference of State Legislature's survey, fees were identified as fixed charges for specific government services. Taxes usually are based on a percentage of income, sales or other targeted revenues. Fees are voluntary, since people can avoid paying them by not using the fee-based services. Taxes are compulsory.

 

Higher fees often cause grumbling but rarely the sort of intense resentment that can lead to the defeat of candidates. That's why they've become so popular among the nation's governors. "It's a lot easier to double the driver's license fee than to raise the sales tax," said Mandy Rafool, a policy analyst with the conference.

 

While fees may not pose the same level of political risk as taxes, they still can cause headaches. New Jersey officials abandoned proposals to increase fees for salt water fishing licenses and dog kennels due to public outbursts, and they sharply reduced fees paid by billboard owners in response to heavy last-minute lobbying by the industry.

 

Despite California's immense $38 billion deficit, lawmakers there have vowed to repeal car and truck registration fees, which were recently tripled.

 

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