Establishing User Fees: Theory and Practice in Canada.

• Author: Bowlby, J. Mark

There is much debate surrounding the increasing application of user fees in the municipal context. This article establishes basic guidelines for the establishment of user fees and demonstrates that water/sewer services, recreational services, and urban parking are strong candidates for their use.

User fees are not a recent phenomenon. Municipalities have been charging citizens for water and sewage services and parking and recreation facilities for years. Charges also are commonly applied to garbage collection, licensing and inspection services, and even for fire and police services used by non-residents of a municipality who are involved in accidents or false alarms.

Faced with fiscal restraint, the Canadian federal government has downloaded considerable responsibility to the provinces, which in turn, have transferred responsibility for service delivery to municipal governments. The pressures of provincial downloading also have been complicated by public demand for increased service provision; the result has been a serious problem for local governments that rely on limited property tax revenues. The examples and arguments presented in this paper have been drawn from the experience of Canadian municipalities. The key issues discussed, however, are universal in nature and provide direction to policy makers internationally.

The need for new or improved service provision has resulted in municipal units considering user fees for a broad range of services. However, while much discussion surrounds user fees, municipal governments have not greatly increased their use. A comparison in the distribution of municipal government revenue in Canada from 1988-1998 reveals user fees as a portion of total revenue have risen by only .7 percent. In those cases where user fees have been used, the rationale has been largely to simply increase financial resources. Individual analysis of the provinces reveals a different trend. The largest portion of total municipal revenue is collected in Ontario and Quebec; their lack of increased use of user fees has kept the total Canadian number low even though municipalities in other provinces have increased the percentage of total revenue derived from user fees. Nova Scotia has experienced a 50 percent increase in user fee revenue with a rise from 10 to 15 percent over the 1988 to 1998 period. Similarly, Bri tish Columbia experienced a 10 percent increase over the same period; Alberta, Saskatchewan, and Manitoba all experienced similar growth in user fees revenue, as well.

Argument Supporting User Fees

User fees are based on three main arguments: philosophic, political, and economic rationales. The philosophical rationale assumes that those who clearly benefit from a service should be the ones to pay for it. For example, if the cost of acquiring a service is greater than the benefit the consumer derives from using it, then he or she will adjust their level of consumption. Service levels and the size of the fee charged develop and change as consumption levels and costs change; in the end, a higher level of service can be provided without subsidies from property tax or some other source.

The political rationales for user fees are based on representativeness and accountability. Representativeness refers to the degree to which citizens' interests are reflected in decisions made by governments. Since governments generally have conflicting preferences to balance in making policy and fiscal decisions, it is impossible to fill every citizen's demands. Further, the options are limited: taxation as a means of generating revenue removes control over decision making from the hands of the individual. Given the alternatives, user fees can be an attractive option offering enhanced accountability when they are earmarked for a given purpose.

Where hard-pressed urban officials see user charges as a revenue source, economists see economic efficiency. User charges provide information to consumers and officials about the demand for and cost of providing services, enabling them to make personal choices that maximize their financial resources. Economic efficiency occurs when fees are set at a level where the cost of producing an extra unit of a good is equal to the value that consumers place on that extra unit. Efficiency results because neither the producers, nor the consumers, can be made better off by shifting their money into consuming or producing some alternative good or service.

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