Revenue & Spending
More Federal User Fees Could Be Part of a Mini Budget Deal
by Nick Schwellenbach, 11/5/2013
Observers have low expectations of the special House-Senate committee set up to craft recommendations for a long-term fiscal deal to replace the next nine years of so-called "sequestration" (automatic and indiscriminate budget cuts). Those recommendations are due by Dec. 13. The committee met for the first time last week, with Republicans publicly opposed to tax reforms that could generate more revenue and Democrats rejecting a spending cuts-only approach. But some think a smaller deal could happen to replace a year or more of sequestration, involving more "federal user fees" as a modest way to generate more funding.
There are substantial reasons to believe user fees are on the table. President Barack Obama proposed a wide array of such fees in his Fiscal Year (FY) 2014 budget blueprint released in April (see pages 223-232). Special Committee Co-Chair Paul Ryan (R-WI) requested and received a Government Accountability Office (GAO) report on designing user fees.
The president's proposals – if they had been enacted for the full FY 2014 budget period (which began on Oct. 1) – would have increased estimated revenue by $3.2 billion in 2014 and an average of $16.9 billion from 2015 through 2023 for a total of $155.3 billion in additional revenue over ten years. This total sum on its own would be enough to replace roughly one and a half years of sequestration cuts. (Of course, these proposals were not enacted.)
The president's user fee proposals are diverse; there are at least 45 of them. Some are controversial. It is unclear which user fees are being discussed by the joint House-Senate committee.
This article will briefly describe what federal user fees are, the philosophy behind them, and some standards for assessing their appropriateness. It will then briefly examine a small handful of proposals in the president's latest budget blueprint.
What Are User Fees?
The White House estimates that user fees already comprise $326.5 billion in federal revenue in FY 2014 alone. These fees are defined by the White House the following way: "fees, charges, and assessments levied on individuals or organizations directly benefiting from or subject to regulation by a Government program or activity, where the payers do not represent a broad segment of the public such as those who pay income taxes."
There are other ways of defining user fees. For the purposes of this piece, the White House's definition is used. User fees do not include dedicated taxes (such as Social Security taxes or gasoline taxes), customs duties, or fines or penalties that come out of civil and criminal cases.
When Do User Fees Make Sense?
When Benefits are Limited in Scope
Fees are appropriate when a relatively small number of people or businesses directly benefit from a government activity ‒ and the government activity in question is not intended to produce a general social benefit. In these circumstances, fees are levied on a particular group that receives special benefits, instead of being spread across the general population. But while this seems like a clear principle, in real world situations, the lines can be murky and judgments about whether certain programs have broad benefits versus more narrow benefits may be subjective.
Not Appropriate for Services that Provide Broad Benefits
Taxes, rather than user fees, are a more appropriate mechanism for funding programs that are of broad benefit by all or most members of society. The White House uses this example to illustrate the difference: "The benefits from national defense accrue to the public in general, and according to this principle should be (and are) financed by taxes. In contrast, the benefits of electricity sold by the Tennessee Valley Authority accrue primarily to those using the electricity, and should be (and are) financed by user charges."
In Some Cases, Fees May Supplement Taxpayer Funding
Other scenarios call for a mixture of funding from both taxes and fees. The White House points to national parks as an example: "…the benefits from recreation areas are mixed. Fees for visitors to these areas are appropriate because the visitors benefit directly from their visit, but the public in general also benefits because these areas protect the Nation's natural and historic heritage now and for posterity. For this reason, visitor recreation fees do not generally cover the full cost to the Government of maintaining the recreation property."
How High Should the Fees Be?
When the government uses its sovereign governmental authority to certify the safety of a product, as it does when providing Food and Drug Administration approval, it seems fair to charge a company what the approval process costs the government to perform. If the government is engaged in a business-like activity, such as leasing federal buildings to companies, it should charge market prices. Below-market prices could undercut private competition, as well as yield less revenue for the government.
The GAO notes in its September report that fees authorized under the Independent Offices Appropriation Act "must be (1) fair and (2) based on costs to the government, on the value of the service or thing to the recipient, on public policy, or on interest serviced."
A Selection of White House User Fee Proposals
The president's budget is the starting point in the normal annual budget process. While the budget process has not followed normal rules for several years, it is still an important point of reference for congressional and executive branch deliberations on fiscal policies. The budget is also a political document in that it represents the priorities of the White House.
The following user fee examples are taken from the president's budget for fiscal year 2014. The first is a controversial proposal that some might be surprised to learn is considered a user fee.
Means-Test Medicare Premiums: $50 billion over 10 years
One of the Obama administration's most controversial proposals would increase the monthly premium that higher-income seniors pay for Medicare. Arguably, this double-taxes higher-income Medicare recipients who already paid higher taxes in their working years. If some participants drop medical or prescription drug coverage because of the higher fees, it could also produce gaps in health care coverage and increase per-capita costs. Imposing "user fees" on higher-income seniors' premiums would result in $50 billion in revenue over 10 years.
Moreover, means-testing could also erode political support for Medicare over the long run. As a detailed Center for Effective Government article on these means-testing proposals noted earlier this year: "Programs that provide equal benefits to citizens regardless of income are more likely to retain much broader popular support over time than means-tested programs."
Higher Industry Fees for Food and Drug Administration Activities: $3 billion over 10 years
The White House has proposed enabling the Food and Drug Administration (FDA) to charge fees to fund its operations. Fees would be charged to:
- Medical product manufacturers for re-inspections if violations are discovered during an initial inspection ($150 million over 10 years);
- Food facilities for registration and inspections, as well as for food imports. These would "finance activities that support the safety and security of America's food supply and help meet the requirements of the FDA Food Safety Modernization Act" ($2.5 billion over 10 years);
- International couriers (e.g. UPS, FedEx) that are bringing a growing number of imports regulated by the FDA, especially medical products, into the U.S. This fee would pay for more FDA surveillance of imported products ($60 million over 10 years);
- Cosmetic and other beauty products companies to help pay for FDA oversight of safety related to these goods ($200 million over 10 years);
- Companies that notify the Food Contact Notification Program before marketing packaging and processing equipment that come into contact with food. The revenue will help FDA "promote safety and understanding of the products that into contact with food" ($50 million over 10 years).
In total, these fees are estimated to generate roughly $3 billion in additional funding for FDA over 10 years.
Military Health Care Co-Payment Increase and Greater Fees: $29.7 billion over 10 years
The president's budget contains proposals that would increase medical costs for active duty military families and retirees that use TRICARE, the Defense Department's health care program. The proposals would:
- Increase pharmacy benefit co-payments "to encourage the use of less expensive mail order pharmacies and military treatment facility pharmacies." This would save an estimated $15.3 billion over 10 years directly and lead to $4.7 billion in savings in the Medicare Eligible Retiree Health Care Fund.
- Increase enrollment fees, increase deductibles, and adjust the catastrophic cap. These proposals combined would save an estimated $9.7 billion over 10 years.
Organizations such as the Iraq and Afghanistan Veterans of America have generally opposed increasing health care-related fees for active duty members of the military, their families, and veterans.
Aviation Security Fee Increase: $25.9 billion over 10 years
Since 9/11 and the establishment of the Transportation Security Administration (TSA), the aviation passenger security fee charged each passenger has remained at $2.50 per plane flown – limited to a maximum of $5 per one-way trip. Meanwhile, TSA's costs have risen. The fee currently pays for about 30 percent of TSA's costs, including the Federal Air Marshal Service and TSA overhead. The White House's proposal would change the fee to $5 per one-way trip (regardless of how many planes the passenger is on) and then allow a 50 cent annual increase from 2015 through 2019. This proposal is estimated to raise $25.9 billion over 10 years. Of this, $7.9 billion would be used to pay for aviation security and the other $18 billion would be used for deficit reduction.
Increase the Budget of a Key Financial Regulator: $3.2 billion over 10 years
The White House proposes allowing the Commodity Futures Trading Commission to collect fees from the businesses it regulates equal to the appropriations it gets from Congress – in theory, this could up to double the CFTC's budget by an estimated $3.2 billion over 10 years. The CFTC's mandate was greatly increased under the Dodd-Frank Act of financial regulatory reforms that gave it the power to oversee over-the-counter derivatives or swaps, which played a part in the financial crisis. "At 674 people, we are only slightly larger than we were 20 years ago," said CFTC Chairman Gary Gensler in a speech on Oct. 31. "Since then though, Congress gave us the job of overseeing the $400 trillion swaps market, which is more than 10 times the size of the futures market we oversaw just four years ago. Further, the futures market itself has grown fivefold since the 1990s."
Giving the CFTC the power to charge user fees would also "make CFTC funding more consistent with the funding mechanisms in place for other Federal financial regulators," such as the Securities and Exchange Commission. Because other regulators charge user fees, "the CFTC was the only regulatory agency that was essentially closed during the US government shutdown earlier this month," as the Financial Times noted.
"One of the greatest threats to well-functioning, open, and competitive swaps and futures markets is that the agency tasked with overseeing them is not sized to the task at hand," Gensler said in his speech. Because of current budget limitations, the CFTC may have to delay enforcement cases or drop some altogether and may face difficulty retaining and recruiting talented employees. One example of a dropped enforcement case due to inadequate resources, according to the Wall Street Journal: "the agency's decision not to charge Julien Grout and Javier Martin-Artajo, the two former J.P. Morgan traders accused by the government of hiding multibillion-dollar losses."
Make Oil and Gas Companies Drilling on Federal Lands Pay for Inspections: $480 million over 10 years
The Interior Department's Bureau of Land Management (BLM) wants to charge new inspection fees to oil and gas companies that drill on federal lands. The fees would be based on the number of wells per oil and gas company drilling facility and are estimated to generate $48 million in 2014. BLM predicts that it could both expand its inspection and enforcement program (by $10 million) while reducing its reliance on taxpayer dollars to fund its operations (by $38 million). Over 10 years, these fees would generate nearly half a billion dollars.
Oil and Gas Royalty Reforms: $2.5 billion over 10 years
The administration proposes a package of legislative and administrative changes that would increase the return to taxpayers when federal resources are sold and developed by oil and gas companies. According to the budget, the changes proposed are:
- Establishing minimum royalty rates for oil, gas, and similar products;
- Increasing the standard onshore oil and gas royalty rate to align it with the higher offshore rate;
- Repealing legislatively mandated royalty relief for "deep gas" wells;
- Use stronger oil and gas development requirements like shorter leases, stricter enforcement of lease terms, and monetary incentives to move leases into production;
- Simplify the way royalties are valued; and
- Get rid of royalty "in kind" payments (e.g. where payment is made in oil and gas itself instead of monetary payments).
The White House estimates that these reforms will collectively generate $2.5 billion in revenue over ten years. More money would be generated for state governments as well because royalties from production on federal lands is split with the states where the production occurs.
User Fee Proposals Must Be Assessed Individually
Collectively, these seven user fees alone would generate about $115 billion over 10 years. If all 45 of the user fees suggested in the president's FY 2014 budget were enacted, over $155 billion in revenue would be raised over 10 years. Yet, as demonstrated above, some user fees are controversial and represent a significant departure from current policy. Each proposal and its impact on the constituencies affected should be carefully examined. In an upcoming paper, the Center for Effective Government will conduct a deeper examination of the president's user fee proposals.