User fee financing

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User fee financing is a policy of paying for a specific service (e.g., water and sewer service) by charging individuals and organizations based on their level of use of that service. User fee financing can be contrasted with how governments pay for most services, which are often provided at no additional cost and are instead funded by general fund revenues provided by the collection of unrelated taxes and fees. User fee financing has generally been applied for governmental programs that aim to serve a specific purpose and for which the measuring of consumption and allocation of cost is administratively efficient. A related concept to user fee financing is dedicated tax financing, between which there is no strict distinction. Examples of user fee financing include water and sewer systems and other utility bills. A prominent example of dedicated tax financing is the Highway Trust Fund, which dedicates revenues from the federal fuel tax (18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel fuel) to fund the interstate highway system.




The Department of Transportation of City A built a tunnel with 2 mile length. Both the entry and exit of the tunnel has a toll gate to collect the $5 one-time passing fee for cars and $10 one-time passing fee for trucks. The toll revenue were collected and only used on the maintenance and other construction work that were relevant to the tunnel’s operation.



Tradeoffs of implementing this policy may include:

  1. Statewide or nationwide user fee could be less politically feasible
  2. There could be large compliance and administrative cost to ensure the collection of the user fee
  3. Cost-based user fee structure requires constant adjustment, which increases administrative cost
  4. User fee structure that is not based on cost fails to reflect the program’s market cost. Either the underpriced or overpriced user fee would be detrimental to the agency’s financial performance, and could impede the agency’s prospect of acquiring other resources.
  5. Designing the user fee structure involves complex stakeholder analysis, which impede the program's efficiency
Compatibility Assessment

Compatibility Assessment.png

If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Is the scale of the program manageable?
  2. Does the designing agency have the capacity to ensure the compliance of the user fee policy?
  3. Is there any demonstrated willingness to pay from the local public?
  4. Could the user fee financing structure be approved without legislative process that could impede its adoption?
  5. Is the user fee revenue stable and sufficient to fund the operation and maintenance of the program?
  6. Does the agency have any kind of rainy-day fund to maintain the program once there were severe loss of use fee revenue?


The following questions should be considered when determining how to implement this policy:

  1. Does the fare rate of the user fee accurately reflect the program cost in the market place?
  2. Is there any adjusting mechanism that could be used to adjust for the trend in national and local economy. Such as inflation, Consumer Price Index (CPI), unemployment and substantial change in the demographics?
  3. Is there any circumstance that the program would need ad hoc fund to sustain the service?
  4. Is the funding structure in compliance with the regulatory agency, such as Congress, Office of Management and Budget (OMB) or local treasury department?
  5. What are the alternative financing options for the program?
  6. What are the role of stakeholder in reviewing the user fee adjustment?



  • Notable entities who have implemented or adopted this policy include:




  • Advocates - Limited Government. Assumption: government agencies could attempt to circumvent other fiscal mechanisms (say, federal tax regulations) by raising or lowering the fees they administer. One prominent example is if the U.S. FDA adjusted its application fee for new drug prescriptions. [1]


  • Advocates - Progressive Taxation. Assumption: the user fee charged by governmental programs that are designed to help the vulnerable population could be regressive. The same amount of user fees could account for a bigger portion of the consumer benefit for those with less means than for the affluent. One prominent example would be instituting fees on public housing development. [1]






  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Federal User Fees: A Design Guide. United States Government Accountability Office (GAO) Report to Congressional Requesters, GAO-08-386SP. May 2008.
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