Taxes, Fees, Charges: What’s the Difference?

This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. A new article is added each week – read all of MACo’s Policy Deep Dives.

Government revenue is critical to funding all public services. In Maryland, county governments receive revenues from two primary sources: own-source revenues, which include locally generated revenues such as property taxes and income taxes, fees, and intergovernmental revenues, which include federal and State funding.

Here, Conduit Street breaks down the differences between taxes, fees, and charges.

Taxes

The State possesses the inherent power to tax as an aspect of its sovereignty. Local governments, as subdivisions of the State, are not sovereign and may impose taxes only if the State confers this power on them.

Article 14 of the Maryland Declaration of Rights states “[t]hat no aid, charge, tax, burthen, or fees ought to be rated or levied, under any pretense, without the consent of the Legislature.” Accordingly, all power to impose taxes at the local level derives from a statutory grant of authority from the General Assembly.

Generally, counties levy taxes to raise revenue for core services, like schools, public health, public safety, and other essential services upon which all county residents depend. Tax revenue is generally not earmarked for specific purposes (although special taxing districts may levy property taxes for identified purposes).

Locally generated revenues, or own-source revenues, account for the majority of revenues in most counties. Local own-source revenues include property, income, and other local taxes; service charges; license and permit fees; and other miscellaneous revenue.

The reliance on local own-source revenues varies among counties, reflecting the differences in the revenue-raising abilities of local governments. However, property and income taxes are two major sources of local own-source revenues for county governments. Property tax revenue is driven by a jurisdiction’s assessable base and property tax rates, and income tax revenue is driven by a jurisdiction’s taxable income and local income tax rates.

Other local taxes include transfer, recordation, sales and service, admissions and amusement, mobile home/trailer park, and other miscellaneous local taxes.

Fees/Service Charges

Many counties also assess various fees or charges for certain activities or services. The idea is simple: the people who pay for the service are the beneficiaries of the service. However, unlike taxes, fees are levied to fund specific services. For example, state and local 9-1-1 fee revenue is dedicated to 9-1-1 services and may not be spent for any other purpose.

County governments rely on service charges to offset the costs of providing public utilities and other infrastructure due to the continual growth throughout the state. Charges are typically based on volume (like a water bill).

Impact Fees/Building Excise Taxes

Managing growth continues to be an issue confronting local governments in Maryland. Local governments have several tools to manage growth, including development impact fees and excise taxes. Development impact fees and excise taxes are charges on new development fund capital programs and services necessitated by growth.

Local governments must have the General Assembly’s authority to impose a development impact fee or excise tax. Code home rule counties are authorized as a group to impose specified impact fees and excise taxes, and several other counties have specific authorizations from the General Assembly.

Many local governments levy impact fees and excise taxes to offset or cover some portion of the cost of new off-site infrastructure needs that result from growth. Current impact fee applications include water, sewer, roads, parks, schools, and solid waste.

As a result of these one-time charges, local governments can shift the costs of financing new public facilities from existing taxpayers to developers — often eliminating the need for jurisdiction-wide tax increases.

There are important distinctions between impact fees and building excise taxes:

Impact fees: These fees support facilities required explicitly by new development projects. As such, there must be a reasonable connection between the amount of the impact fee imposed and the actual cost of providing facilities to the properties assessed. Moreover, the revenue from the fee must be dedicated to delivering substantial benefits to those properties.

Building Excise Taxes: Unlike an impact fee, the excise tax amount does not have to be closely related to the cost of providing public facilities to serve new development. In addition, excise tax revenue does not have to be spent to specifically benefit the properties that are taxed but can generally be spent throughout the jurisdiction.

Stay tuned to Conduit Street for more information.

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