Good Government and the Quest for the Palatable Fee

A recent NYT article discussed the growing trend among cities to cover revenue shortfalls by charging fees for municipal services.  One fee, in particular — the “cash-for-crash” fee  charged to drivers for the police response to their accidents — is stirring outrage.  Not coincidentally, it also has a limited compliance rate. Only 20% of citizens paid up in the city the article mentioned.

What’s driving these dynamics? And should we care? As the article explains, fees can appeal to our sense of fairness:

Politicians tend to regard fees as more palatable than taxes, and more focused too. If a state needs to finance an infrastructure to oversee fishing, why shouldn’t fishermen foot the bill?

Palatable is exactly the right word here. Fees for new infrastructure may indeed seem reasonable to taxpayers, particularly if it’s a public investment that only a small percentage of citizens will ever use. But fees for services at the core of the contract between citizens and government, fees for things our taxes have been covering for centuries (like police response), are much harder to swallow.

Should cities in crisis waste any time on the search for the palatable fee? A look at IRS compliance rates might give some public servants a reason to pause. The IRS has a very high tax compliance record compared to other countries.  The US is at 85% compliance, for example, while many other countries are in the teens.

This high compliance rate means that the cost of collection is low, and the revenues collected are high. Maintaining high voluntary compliance is essential to making the system work. Voluntary compliance is driven largely by things such as belief in the fairness of the tax system in terms of who pays and how the money is spent.  The perception of corruption, for example, translates into low voluntary compliance rates because citizens don’t trust that their money will be spent on the collective good.

As described by a deputy commissioner of the IRS in a case I wrote several years ago:

When you go down to any country in South or Central America
and you sit down with their commissioner of taxes, they just marvel at our compliance levels, because in their countries they say they can’t even measure, but generally, it’s single digits, 7 or 8%. The rest is enforcement.

The risk of a public revenue strategy that feels unfair is that citizens will eventually stop paying. Even in God-fearing, tax-paying America? I would suggest that the lack of compliance with U.S. cities’ new cash-for-crash fees is a big red flag. When “unpalatable” hits critical mass — as it has in many Latin American economies —  the focus shifts from maintaining high voluntary compliance to investing heavily in enforcement. The economics of the former are far more appealing than the latter. To say nothing of the reelection implications.

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