University of Toronto Law Journal 54.4 (2004) 391-447
[Access article in PDF]
Benefit Taxes and User Fees in Theory and Practice†
David G. Duff*
In order to raise revenues to finance public expenditures, governments typically collect general taxes on income, consumption, or wealth, as well as more specific benefit taxes and user fees imposed on the presumed or actual beneficiaries of government expenditures. In Ontario, for example, the provincial government levies general taxes on personal income, retail sales, and corporations, as well as more specific gasoline and fuel taxes and fees for vehicle and driver registration.1 Similarly, Ontario municipalities collect both general taxes on residential and non-residential property and specific fees for water and sewage treatment, solid waste collection and disposal, public transit, and public recreation.2
As alternatives to more general taxes based on broad measures of each taxpayer's economic capacity, benefit taxes and user fees are condemned by some and praised by others. According to a leading tax scholar of the early twentieth century, for example, the idea that taxes should vary according to the benefits that persons receive from government is 'the principle away from which all modern science and progress have been working,' a principle based on 'a false political philosophy' from which follows 'a false political economy.'3 In a similar vein, another prominent tax scholar rejected the benefit principle of taxation as 'a significant element in a reactionary social philosophy, constructed from the gratuitous implications of laissez-faire economics.'4 Relying on the ability to pay principle advocated by these scholars, the Canadian Royal Commission [End Page 391] on Taxation (Carter Commission) downplayed the role of benefit taxes, concluding that '[a] careful examination of the goods and services provided by government or government enterprises does not suggest that greater emphasis should be placed on the benefit approach in Canadian taxation.'5
Others, however, extol benefit taxes as preferable to general taxation in various ways. According to Canadian economist Richard Bird, for example, 'it is only through the application of benefit taxes that an appropriate level and structure of government activity can, at least in theory, be determined simultaneously with the means of financing it.'6 For Richard Wagner, moreover, only benefit taxation accords with the values of individual autonomy and citizen sovereignty that underlie contractual conceptions of the state, while taxation based on ability to pay accords with an 'absolutist order.'7
In contrast to these critics and advocates, this article adopts a more even-handed approach to benefit taxation, regarding benefit taxes and user fees as preferable to general taxation for specific purposes but inferior to general taxes for other purposes. Part II provides a theoretical framework for analysing benefit taxes and user fees, defining these levies in contrast to general taxes, examining theoretical arguments for and against reliance on benefit taxes and user fees, considering the appropriate role of benefit taxes and user fees as a method of government finance, and reviewing the manner in which these levies should be designed. Part III considers benefit taxes and user fees in practice, surveying the extent to which governments rely on these levies in Ontario and other jurisdictions and examining the current and potential application of benefit taxes and user fees to finance various categories of government expenditures. Part IV summarizes the argument of the article and offers general conclusions.
II Benefit taxes and user fees in theory
In order to evaluate the role of benefit taxes and user fees in actual tax systems, it is helpful to begin by understanding the characteristics of these levies as opposed to general taxes, arguments for and against the collection of revenues in this form, the implications of these arguments for the role of benefit taxes and user fees as a method of raising revenue, [End Page 392] and the ideal design of these levies in order to achieve the purposes for which they are best suited. As a foundation for the analysis of actual taxes and expenditures in Part III of this article, the following sections provide this theoretical framework.