Addressing the Fairness of Municipal User Fee Policy
User fees are one of the principal funding mechanisms for a range of municipal services, from water and waste management to transit and recreation. Economists have also traditionally seen them as an efficient revenue source since they allow municipalities to pay for a service by directly charging those who use it. Critics argue, however, that user fees are regressive and impose a higher burden on those who are relatively poor compared with those who are relatively rich.
In a new paper for the Institute on Municipal Finance and Governance (IMFG), Almos Tassonyi and Harry Kitchen set out to explain why user fees are a good source of revenue for certain municipal services, how user fees are employed by a select group of Ontario municipalities, and how municipalities can navigate the trade-off in user-fee design between efficiency and fairness.
The paper analyzes two approaches for implementing user fees: the “benefits-received” principle, which states that those who benefit from a service should bear the cost of it, and the “ability-to-pay” principle, which suggests that those with higher incomes should bear a greater proportion of the cost. It concludes by considering how user-fee design for nine services can apply these two principles.