Each class and type of non-tax own-source revenues carries different strategic considerations that are important to evaluate when framing policy recommendations. At present, among the most widely used types are user charges and fees related to government services. User charges are most appropriate for public goods and services such as public transit, water, sanitation, tolls (as described in Case Study 1), and others where the majority of the benefits of the particular good or service are confined to the consumer.
Proponents of the “benefit principle” support the idea that a citizen who benefits from a government service should pay for it. Charges and fees are often determined based on the quantity consumed. This provides local governments an indication of service needs and therefore allows local officials to maximize efficiency by proactively matching supply and demand. Additionally, when effectively implemented, user charges and fees provide information to consumers about how much public goods and services cost, thereby enhancing the efficient allocation of services and achieving pricing transparency. This can produce an added benefit of boosting fiscal transparency and local government account-ability, ultimately resulting in more effective and responsive government entities.
However, an additional important consideration is the potential for charges and fees to disproportionately impact the citizens least able to pay, particularly low-income citizens. This concern is magnified in the context of essential government services, such as water, sewer, sanitation services, and others. This gives rise to the important question of whether the provision of these goods and services should have a redistributive focus, or whether it should instead be guided by cost-based principles (including marginal cost pricing and others focused on efficiency).
Civic engagement dynamics can also potentially play a role in the success of non-tax own-source revenue frameworks that are reliant on charges and fees, particularly where there is a visible disagreement between governments and citizens with respect to the price citizens pay for public services. This dynamic can deter the establishment of a “users-pay” culture, which can be necessary for non-tax own-source revenue frameworks to succeed from an administrative and collections standpoint. This dynamic is particularly visible in the widespread resistance to the payment of user fees within the impoverished segments of some countries’ urban populations.
The political climate surrounding a particular public-service pricing regime, as well as the regime’s perceived legitimacy, can also impact the strength of a charges and fees framework. In some jurisdictions, a user charge can help support services that would otherwise be financed in a general fund and shift the funding of those activities to a self-sup-porting enterprise fund. Scholars have commented on this phenomenon, observing that
“municipalities facing financial and political obstacles often use the fee-supported service model for many of their public services outside of the tax-supported general fund services, because fee-supported services charge customers, not the community as a whole, and possibly generate profits. … Since a user charge is a market-like financing which shifts general fund activities to fee-supported enterprise fund activities, the usage of user fee-supported goods and services has become a popular strategic effort for cities.”
Revenues generated from government-owned assets are another important, and often underutilized, source of non-tax own-source revenues—one that carries unique strategic considerations. While these revenues can be particularly useful for financing local infrastructure and other important investments, it is important to consider the revenue generation capacity of each asset. Equally important is the consideration of any constraints and of the sustain-ability corresponding to the asset, particularly where naturally occurring resources (oil, gas, minerals, etc.) are harvested.
Some classes of non-tax own-source revenues from government-owned assets—such as PILOTs—may be limited if they can only be generated from certain discrete institutional actors. PILOTs, as noted in Table 1, have emerged as voluntary payments made by private non-profits and other tax-exempt entities. For municipalities that rely heavily on property taxes, or are working to strengthen their local property tax base, PILOTs may become an important source of non-tax revenue. In recent years, they have gained popularity in Canada and the United States, where several cities—including Boston, Philadelphia, Baltimore, and Pittsburgh—have begun collecting PILOTs. Given that PILOTs are voluntary, municipalities that collect PILOTs have developed a number of incentives to encourage non-profits and other tax-exempt entities to participate. For example, “non-profits may agree to make PILOTs because they realize that they share an interest in the fiscal health of the local government.” In other instances, non-profits agree to PILOTs because they depend on public goods and services and on the cooperation of municipal authorities in granting building permits and zoning changes. PILOTs thus constitute a new and potentially strong revenue stream from this discrete user base.
Betterment levies, or special assessments, also harness the value of land as an asset, but the application of revenues resulting from such sources can carry some limitations. A typical betterment levy is imposed by a government on the owners of a select group of properties. It is used to either entirely or partially fund the cost of a specific improvement or service that benefits the public (generally) and confers a special benefit upon the owners of certain specific properties. The enabling legal framework in some jurisdictions—for example, Colombia— provides for the consideration of “benefit factors” when calculating and assessing the levy, and can include defining a “virtual area” and using select factors to determine which entities benefit within the designated physical area.