…But It’s Regressive!

This post was inspired by Stephen Gordon over at Worthwhile Canadian Initiative. I had mentioned in my previous post, that user fees work on the principle of fairness because you get what you pay for. This is the benefits-received definition of equity.

Another definition of equity is a person’s ability to pay. With user fees, all consumers pay for the cost of the good or service regardless of their income, a key measure for ability to pay. Ability to pay is the most frequent argument against user fees, specifically that they are regressive. When the financial burden of a service falls more heavily on low income households, it is referred to as regressive. This usually manifests itself as the tax payment taking a larger portion of the after-tax income of low income households. This critique was offered by the Official Opposition in response to a federal government initiative to increase user fees, “NDP Treasury Board critic Alexandre Boulerice said user fees discriminate against the poor because unlike income taxes, they are not geared to income.”

The literature, however, is not conclusive regarding the regressive nature of user fees. In fact the evidence suggests four main arguments against user fee’s regressivity.

  1. First, upper-income households benefit disproportionately from free public services. For example, upper-income households are more likely to live in large households and consume more than their share of sewage, water, and refuse collection than lower income households when these services are funded through property taxes and not user fees.
  2. Second, user fees allow low-income consumers to adjust their consumption to lower levels, thereby paying less than they would under a property tax system.
  3. Third, any regressive or disproportionate effects can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms, particularly discounts and exemptions for readily identifiable groups, a point made clearly in a paper I co-authored on congestion charges. It is possible to accommodate equity concerns not just through fee reductions, but also operational changes. For example, providing more services to low income areas or reducing the burden of the fee by accepting various forms of payment or allowing individuals to pay by month rather than one up front yearly fee.
  4. Fourth, one must examine the incidence of any other tax or taxes that might be reduced at the same time and the incidence of the publicly provided goods and services to which any revenue is devoted. This means that examination of the equity concerns of user fees is an important aspect of user fee implementation and the equity assessment must be comprehensive to ensure a full understanding of the effects of the user fee on other correlated levies and goods and services.

I get very frustrated when someone just dismisses a revenue instrument (like user fees and consumption taxes) on the ground of regressivity. Income taxes, after all, can be regressive. We just choose for them not to be. Same is true of user fees. They are only regressive if you let them be regressive. It is time that we elevate discussions on these type of taxes beyond this hyperbole and talk about what we can do to address these types of concerns during design and implementation.