User fees assign part or all of the costs of these programs and  activities—the cost of providing a benefit that is above and beyond what is  normally available to the general public—to readily identifiable users of  those programs and activities. Definition of User Fees

For the purposes of this guide we use the term user fees to include user  fees as well as excise taxes with a “user pays” element. The boundaries between fees and taxes are  not always clear and the tradeoffs among design elements presented in  this guide can be relevant to both. Legislation authorizing a user fee may enact a  specified rate or amount to be assessed or may stipulate how the fee is to  be calculated, such as a formula; the method and timing of collection; and  the authorized uses of the fee collections, which may be broadly or  narrowly defined. First, as shown on the  left side of figure 2, the extent to which a program provides benefits to the  general public versus users should guide the proportion of total program  costs that are paid for by general revenues versus user fees. User fees set under the beneficiary-pays principle can also enhance  economic efficiency by ensuring that resources are allocated to the most  highly valued use, as users make adjustments to their consumption of the  service based on their costs and benefits. Although user fees can promote one facet of equity—the beneficiary-pays  principle—they may run contrary to another facet—the ability-to-pay  principle. For example, in May 2007, U.S. Collecting User Fees: Balancing Compliance with Administrative Costs

The primary challenge in determining when and how to collect a fee is  striking a balance between ensuring compliance and minimizing  administrative costs (see fig. In some cases, a nonfederal entity such as a state government or private  sector enterprise has an existing infrastructure that can collect the fees. While some maintain that the merits of a program, rather  than its ability to generate fees, should influence federal funding decisions,  dedicating fee collections to the program that generated the fee and giving  the agency authority to obligate and expend the fees readily and decide  how the collections will be used enhance the agency’s flexibility and  ability to respond quickly to changing conditions. Requiring an  appropriation increases opportunities for Congressional oversight on a  regular basis. To ensure that Congress, stakeholders, and agencies have complete  information about changing program costs and whether authorized  activities align with program activities, agencies must substantively review  and report on their fees on a regular basis. Providing for stakeholder  input may affect their support for and acceptance of the fee, and may  contribute to improved understanding about how the fees work and what  activities they may fund. Any user fee design embodies  trade-offs among equity, efficiency, revenue adequacy, and administrative  burden. What degree of access will the agency have to collected fees? Will the fees directly support the related program or agency or be  deposited to the general fund of the U.S. Treasury? Will agency access to fees be subject to Congressional  appropriation?
Why GAO Did This Study

The federal government will need to make the most of its resources to meet the emerging challenges of the 21st century. As new priorities emerge, policymakers have demonstrated interest in user fees as a means of financing new and existing services. User fees can be designed to reduce the burden on taxpayers to finance the portions of activities that provide benefits to identifiable users above and beyond what is normally provided to the public. By charging the costs of those programs or activities to beneficiaries, user fees can also promote economic efficiency and equity. However, to achieve these goals, user fees must be well designed. GAO was asked to study how user fee design characteristics may influence the effectiveness of user fees. Specifically, GAO examined how the four key design and implementation characteristics of user fees--how fees are set, collected, used, and reviewed--may affect the economic efficiency, equity, revenue adequacy, and administrative burden of cost-based fees. GAO reviewed economic and policy literature on federal and nonfederal user fees, including prior GAO work, and used relevant case examples to illustrate different types of design elements and the impacts they may have.

What GAO Found

Setting user fees according to the beneficiary-pays principle can promote equity and economic efficiency. For cost-based fees, the extent to which a program provides benefits to the general public versus users and the cost of providing those benefits should, theoretically, guide how much of total program costs are paid for by user fees and the amount each user pays (see figure). Although this principle provides a useful guideline for setting fees, strictly following the principle is not always desirable or practical. The primary challenge of determining when and how to collect a fee is striking a balance between ensuring compliance and minimizing administrative costs. In some cases, the collection systems of another agency or a nonfederal entity, such as a private sector enterprise, may be leveraged, as when the airlines collect passenger inspection fees. Determining how fees will be used is a balancing act between Congressional oversight and agency flexibility. Congress gives agencies various degrees of access to collected fees. For example, fees may be dedicated to the related program or may instead be deposited to the general fund of the U.S. Treasury and not used specifically for the related program or agency. In addition, fee collections may be subject to appropriation or obligation limits, which increase opportunity for oversight but may limit agencies' ability to quickly respond to changing conditions. Agencies must substantively review their fees on a regular basis to ensure that they, Congress, and stakeholders have complete information. Reviews provide information on whether the fee rates and authorized activities are aligned with actual program costs and activities, may provide opportunities for stakeholder input, and can help promote understanding and acceptance of the fee.