process can be utilized, with very littleadditional cost, to produce some goo dor service for which the public may suit -ably be charged . For instance, in con -junction with its ordinary policing o fthe food industry, the Food and Dru gAdministration can supply, for a reason-able fee, full-time inspectors who will:grade a manufacturer's entire output, fo rany period the manufacturer is willin gto pay for the service . Since at least partof the time an inspector must observeplant activity for regulatory purposes

. :(which requires the same equipmentand expertise as grading), his full-timepresence for grading purposes can 'beprovided by the government at less ex-pense than a private firm would incur .

Still another category of governmen tenterprise exists primarily because o fhistorical accident, which can vary wide-ly from one city or state to the next . For

:,instance, many cities maintain a publicairport while others consider such a fa-cility belongs strictly in the private do -_main . Such functions as the provisionof power, trash collection, etc., some-times fall to public bodies, to publiclyregulated private firms, or even to a com-bination, usually on the basis, of nothingmore than local custom .

The Benefit Principle

To a large degree, the philosophy un-derlying the imposition of charges fo rthose goods and services to which it ispossible to assign a price derives fro mthe well-known principle, admittedl ynow considered old-fashioned in som ecircles, that the best results can beachieved if the direct recipient of publicgoods meets all or most of the costs o fproviding that good . Since today theability-to-pay approach appears to havesupplanted the benefit principle inmany decisions regarding taxation, it

might be appropriate to consider wheth-er the 'benefit principle has been in -validated generally or whether som eparticular reason, not applicable to th esituations in which charges are typicall yused, accounts for the . change.

In the days when people used govern-ment primarily for the provision of basi cservices, identification of the beneficiary,particularly at the state and local level ,did not pose difficult problems . For in-stance, at the city level police and fireprotection primarily served the hom eowner and the businessman, who paidfor the protection through the only sig-nificant local tax, the property tax, i namounts roughly equivalent to service sreceived. But as time has passed, peopl ehave come to use government for mor eand more functions . Some of these servespecific groups of taxpayers and somebenefit society so generally it would b e'impossible to assign them to any particu -lar category of people . Still other govern-ment functions bring direct benefit toidentifiable individuals unable to payfor what they receive ; the welfare ofthese individuals may be considered s ointimately tied in with the general con -.dition of the economy or the social struc-ture that it is assumed direct individualbenefits include secondary benefits dis-bursed widely, Hence, as governmen thas moved into the areas of health, wel-fare, recreation, and transportation ,many projects have been undertaken i nwhich the benefit principle was not prac-tical, since often great numbers of bene-ficiaries simply . did not have the meansto pay. Given a choice between aban-doning the benefit principle or abandon-ing the project, the decision frequentlyswung in favor of the project, whic husually meant the ability-to-pay concep twas brought into the picture . Thus thebenefit principle fell into disuse mor e

31

on pragmatic than pejorative grounds,- and probably remains valid for those

situations where its application does notdamage the general welfare .

A compromise position between th ebenefit principle and ability-to-paysometimes applies in connection wit hcertain public goods, notably healthservices and higher education. Fre-quently charges will approach the poin tof average cost, with reduced prices o rfree services provided for those wh ocannot afford the regular charge . Underthis arrangement, collections earmarkedfrom various taxes or from the genera l-fund make up the inevitable deficits .Those who benefit directly and can pay ,,do so; taxes imposed generally on on eor another basis subsidize :those who. presumably cannot pay .

Charges as an Economic Regulato r

Under ordinary circumstances, fewhuman beings can resist the lure of get-ting something for nothing. Many peo-ple will accept a free item even if theydo not particularly care for it, for n o

'better reason than the fact that it is bein ggiven away. The moment price becomesattached to an object, however, peopletend to give some thought to,whethe rthey really want the object, and whethe rthey want it strongly enough to ex -change the specified sum for it . In gen-eral, the higher the price, the morecarefully the potential customer wil lconsider and the more intense must b ehis need or desire for the purchase . Thusfor a particular good, it generally hap -pens that the lower the price, the mor eof it will be bought, and the higher th eprice, the less . In the private sector ofthe economy, the analogous tendency ofsellers to offer smaller amounts at low

prices and larger amounts at high price sacts to set a meeting point between buy-er and seller that establishes a marke tprice. The interaction between buye rand seller generally has the consequencethat an economy's finite supply of re-sources will be used in the productiveprocess in a way that will yield the high-est level of satisfaction for the indi-viduals making up that economy, withprices acting as a guide to amounts an dmethods of production .

When government is the seller, how-ever, somewhat different circumstance sprevail. Price is administratively set,often without regard for market forces ,while buyers retain their natural behav-ior with respect to the level of price, Th eresult can follow that the quantities pro-duced and consumed may make an ex-tremely wasteful disposition of the econ-omy's resources, with overinvestment insome things and underinvestment i nothers. 3 The introduction of price in th eform of fees and charges can, : however,offer a potent instrument for improvingresource allocation, provided policymak-ers bear in mind that the wide-rangingeffects of the level of price set willex-tend beyond revenue alone .

Conventional Approach toPublic Pricing

A widespread principle applied insetting the level of charges, particularlyin the case of public utilities, has bee nexpressed as a "fair return upon a fai rvalue." In practical terms, this traditio nhas meant that those responsible for es-tablishing the rate structure tend to rate swhich will recover historical or origina lcosts plus average operating costs, Mar -ginal cost pricing does not typically

ienter the picture ; such routine busines s

3 . An additional element of waste stems from the consumer's loss of time and diminished utility as a consequenc eof the congestion which may result when charges are set too low ,

32

considerations as price-induced effi-ciency in the use of existing plant o rprovision for investment leading to m op

, efficient facilities often may be sub-merged in the dominating quest for a fairreturn.

Because of the special conditions un-der which some public facilities mus toperate, market forces cannot correc t"too high" a price . Consequently, whe npricing for profit dominates the settingof rates — as can happen under bot hpublicly regulated private ownership orpublic ownership —the result can beprices that force some buyers to holdG

= their consumption of the service signifi -cantly below what it might be . As a con-sequence, existing plant may be used a tappreciably less than full capacity. Theeffect of a charge high enough to cove rfull cost may so reduce the total quantitydemanded as to deter building of plan t

-,on a scale large enough to benefit fullyfrom the potential cost advantages o flarge-scale operations . Either case leadsto inefficiency in the use of the econ-omy's resources .

At the opposite pole lies the type o f. .,,public good whose production practi-

cally never is subjected to the test of aprofit criterion—for instance, many type sof recreational services, In such case sthere may exist a possibility that thosein charge of providing the service wil lseize upon sheer volume of output as a nindex of effectiveness . Such zeal forquantity might derive from agency or

-bureau heads with a missionary belief in:the value of the good or service provided ,or even with a penchant for bureaucraticempire building . In government as else-

where, size can serve as a measure ofprestige . The temptation to set prices a ta level which will maximize consump-tion exerts a strong influence, even whenadministrators may realize that prices

Ydo not cover anything but current oper-ating costs, or that expansion of thei rparticular function creates external so-rial costs, Such underpricing of publicgoods leads to misallocation of resources ,with excessive amounts of the economy' sresources diverted into production of theunderpriced item .

A third problem in the pricing of pub -lie goods results from the inflexibility as-sociated with the limited autonomysometimes granted to agencies in settingcharges . Sometimes the legislature es-tablishes a range of prices within whic hthe agency must operate . As changestake place in the economy, the range-may become unrealistic, but the agencymay feel dubious about approaching thelegislature for modifications, lest thewhole function be subjected to critica lscrutiny. Hence underpricing may con- .tinue for long periods, until some crisisforces a reevaluation.

An aura of political pressure frequent-ly permeates the price determinatio nprocess in government, usually exertinga downward influence, Goals importantto influential groups may override stand-and economic objectives, with the con -sequence that prices sometimes are se tat levels so low as to require a subsidyfrom general revenues to cover the costsof the function ,

An interesting problem arises if tra-dition or some earlier decision mandate s

4, Jerome W. Milliman, "Price Policy and Land Value Taxation for Urban Water Su plies," A►nerlcan Journa lo/ Economics and Sociology, October 1966, pp . 388 .369, has expressed toe convent (onal public utility pricin gpractices neatly In the following equation : R = E -{- (V -- D)r, R represents the "total revenue required t ocover total costs for 'sound operation' of the . , , system," E. total operation and maintenance costs ,. V, fai rvalue when facilities were new ; D, depreciation, r, fair rate of retu . He points out that this method "probabl yrepresented a nice compromise or balance between such multiple objectives as c uity in the distribution o fwealth between consumers and stockholders, fairness among classes of service, and provision of the financia lneeds of a privately owned utility system" but falls short of meeting modern efficiency and Investment needs ,

33

free or heavily subsidized provision of a sharply in the private hospitals, After ad -public service, but subsequent techno- justments for consumer price leve llogical or social changes lead to an in- changes, expenses in voluntary nonprofi tcrease in the cost of the service consid- hospitals rose 93 percent ; in proprietaryerably out of proportion to changes in (profit) hospitals, by 88 percent .the rest of the economy . Health services ;

The cost of the commitment to pro -provide an example of this situation, vide public hospital care has been in -

As shown in Table 13, in state and lo- creased not only by higher unit costs ,'cal governmental hospitals (excluding but also by the fact that the level of utili -those institutions specializing in long- nation of hospital facilities of all typesterm chronic cases) total expense per pa- has increased. Table 13 shows that th etient day rose 93 percent over the period average daily number of patients in state1957-1967, from $27 to $52. Even when and local governmental hospitals in-these figures are adjusted for the in- creased 30 percent over 1957-1967, fro mcrease in consumer prices over that same 103,000 in 1957 to 134,000 in 1967 . Whileperiod, expense per patient day still rose, -part of this increase stems from a largerby 64 percent. It is interesting to note, U.S . population, some appears to resul thowever, that costs rose even more from a higher rate of hospitalization .

Table 1 3Expense per. Patient ,Day and Average Daily `Number of Patients_ by . .

„ . . . . _ ; n .

_

Type of Hospita lAmount and Percent Increase, 1957 and 1967

Type of hospita l

Voluntary

Proprietary

State and loca lnonprofit

for profit

government

Total. expense per patient da y1957 (current dollars) $ 24

$ 24

27`1967 (current dollars) $ 55

$ 52

52Increase, 1957 .1967 127%

120%

93 %-

1957 (adjusted for consumer $ 24

$ 24

$ 27price increases )

1967 (adjusted for consumer $ 47

$ 45

$ 44price increases )

Increase, 1957.1967 93%

88%

64%Average daily number of patients

1957 (in thousands) 312

23

1031967 (in thousands) 439

35

134Increase 1957. 196 7

_

1957 (per minion of total41

52

301,841

135

607U,S, population )

1967 (per million of total 2,227

177

680U .S, population )

Increase, 1957 .1967 °21%

31/°

12/°Percent of total patient s

1957 71%

5%

24 %1967 72%

6%

22 %Source ; computations based on material in Hospitals, August 1958, pp . 374 .375 and August 1968, pp, 451 ,

455 .465,

34

of the capital equipment and full-timepersonnel maintained for the enterprise .The rational business man operating inan industry subject to time-related vari-ations in demand will try to determineboth prices and the scale of enterpris ewith a view not only to peak demand ; healso will take into account the price a twhich he can divert customers to off-peak periods and the extent to which hi sfacility will be underutilized in these pe-riods. In order to cover both variable andfixed costs, including a normal profi tand thus stay solvent -- a business firmgenerally must charge peak period cus-tomers at a rate higher than unit tota lcosts and must operate at a scale tha twill be utilized at full capacity duringmost of the peak period, He may find i tprofitable to charge off-peak customer sat a level covering unit total costs, o ronly unit variable costs plus a portionof fixed costs, depending on how muchthe quanity demanded responds to dif-

-.ferences in price charged for off-peakuses, The company's minimum goal willbe to select that size of operation andschedule of prices such that combine dpeak and off-peak revenue will equal o r

p e er to enjoy movies an of er enter- exceed total costs (including deprecia-aainment in the evening, and lower mat- tion and a reasonable return on invest-inee prices reflect this fact . Many motels ment) over the full cycle of 'high andand resorts offer lower "oft season" rateswhich begin soon after the end of sum -mer, the period most vacationers prefer ,Home insulation frequently is offered ata discount in the summer ; air condition -ing, at a discount in the winter .

State and local hospital patients per mil -lion of U,S, population rose from 607 i n1957 to 680 in 1967, a 12 percent rise .The possible reasons for this increase

- cannot be identified from the data athand — it should be noted, however, tha tthe rate of utilization of private facilitie sincreased far more rapidly than in thegovernmental case — but one clear resul thas been larger outlays for providing theservice. Under such circumstances, th ecollection of charges, where possible ,takes on renewed appeal .

Problems of Peaking,Price, and Scale

The demand for many products andservices — for example, food staples ,household supplies, shoe repairs, to-bacco — runs along on a fairly even keel ,Season makes little difference in con-sumer preference for these products ;time of day makes even less, The deman dfor other ' products, however, respond ssharply to time factors, and manv indus-tries recognize this effect in their pricin gschedules, For instance, most people

f

d h

In general, such pricing variation doesnot derive from a wish to gouge consum -ers when demand is high, but ratherfrom an attempt to spread out sales in away that will make more continuous ,and therefore more efficient, utilizatio n

5, In Prance differing power rates apply at different seasons and hours of the day . A special frequency signa ltriggers a relay on the consumer's meter, which connects or disconnects registers to vary the rate . An experimen twith a similar arrangement, now being conducted in England and Wales, is reported by Ralph 'survey in "Pea kLoad Pricing," Journal o/ Political Economy, January/February 1968, pp, 111 .113 ,

low periods .Peaking problems also arise in connec-

tion with many government-provide dproducts and facilities, For instance ,electric power clearly is subject to sea-sonal fluctuations as well as daily varia-tion,' Recent studies have shown that ur -ban water use not only fluctuates on th ebasis of seasonal, daily, and hourly fac-tors, but that urban growth appears t oaggravate the contrasts between pea kand off-peak use levels, One survey of

35

more than 200 cities indicated that peak much of the street area where congestionmonths exceeded average demand by imposes greatest costs in loss of time andabout 40 percent ; peak days, by about othor forms, Highly competent traffic en-60 percent; and peak hours exceeded ay. gineers and economists have addressedernge hours by nearly 160 percent .' Re- themselves to this problem without any °searchers concerned with water-supply tangible success to date . ?

problems point out that increasing sub -urban living with accompanying iawn- The truly difficult problem in pricin g

transportation facilities lies in the inter -watering

more widespread useontense-

faircon

plus

-

equipment will id

penetrability of the markets for all the

fy-summer peaks yet more, different forms of 'transportation, andthe enormous range of possible adjust -

PeakingPeaking raises serious, almost insolu- ments• Consider the flexibility of de-problems in connection with trans- mand for transportation by public con -

portation facilities . Traffic can clog high- veyance vis-a-vis automobile in a largeways, bridges, airports, busses and sub - metropolitan complex. A change in theways during rush hours and at certain Price for one is likely to affect the de -seasons, and at other times leave these mand for the others, For instance, a nfacilities — all with extremely high fixed increased bridge toll may divert com -costs — virtually idle . Although private muters to the subway systems . But thecarriers to some extent set prices in rec- reduced traffic congestion on the street sognition of peaking problems — airlines, of the central city allows the existing -for instance, offer lower fares during the bus fleet to be utilized more efficiently ,

-

midweek ; commuter railways often have thus attracting some subway riders t ospecial shoppers ' tickets valid during shift to the bus. On the other hand, mo-nonrush hours — such public transporta- torists may not shift to different form stion facilities as roads and bridges gen- of transportation; they may form ca rerally are either free or priced at some pools

or

select

an

alternative

route,unvarying rate. As in the case of public There is always the possibility, too, thatutility pricing, the focus generally lies over a longer run quite drastic adjust-on some aspect of cost recovery, with inents will emerge . Commuters maylittle if any explicit attention given to the move nearer to their jobs or even chang eeconomic effects likely to be associated jobs, business firms may find it expedien twith various possible levels of, or differ- to shift their operations to some geo -elices in, charges, graphical point more convenient for

their employees, This latter type of ad -In thinking about the potential efficacy justnuent can have

such far-reachingof price in guiding resource utilization consequences as shifting population t ointo more efficient patterns, economists regions less favorably endowed than th econsider the possibility of applying price core city, with attendant decline of theto one of today's most serious transporta- core city, Predicting the direction of ad -tion problems, metropolitan rush-hour justment which various segments of thecongestion, Here one meets a most frus- population will choose, and then assess -trating obstacle :

the absence of any ink; the net change in economic and so -practical method for collecting tolls, on cial costs, pose enormous problems ,

6,

Studies by Wottf and others, rind in Miltiman, op, ctt„ p . 385 ,

7,

See, however, some of Professor W1111am Vickrey's ingenious suggestions in "Pricing in Urban and Suburban'transport," American Economic Review, May 1963, pp, 452.465,

36

V16

Some 'Aspects o

.Miscellaneous . Revenue Sources..

Miscellaneous revenue sources com- The General Services Administration ,;prise a particularly heterogeneous group, established in 1949, serves as merchan-The major items of interest income, dicing agent for the Federal government .

_-rental income, proceeds from sales of GSA does not take quite so dynamic an:government property, and special assess- approach to its marketing responsibili -ments fall into the category . This sec- 'ties as do many private firms, perhaps i ntion will consider some of the special -; :-:part because its "stockholders" do not--problems associated with the main types ; anticipate dividends nor critically sca nof .miscellaneous revenue, . -the rate of return on invested capital .

- Nonetheless, it does utilize modern

Sales and Rental of marketing techniques to some degree :

Government Property modest advertising, extension of credit,research, and the like . GSA vends one "

Revenue from the sale and rental of ,product, surplus property . All Federalgovernment property came to about $2 agencies submit to GSA, on a regula rbillion in fiscal 1966, The importance of basis, a list of all property they holdthis source of nontax revenue varies, which is excess to their needs . GSA then

-:however, according to the level of gov- circulates consolidated lists of availableernment. As shown in Table 14, collec- excess property, since one agency's ex-tions from rentals, royalties, and sales as- cess may meet another agency's need ,sumed considerably more importance, ;GSA then may offer the remaining prop -both in absolute 'and relative terms, at arty to the states for use in education ,the Federal level . In 1966, the Federal public health, civil defense, or public`government received well over half of airport functions .

In fiscal 1968, thethe total collections from sale of govern- states received such donations valued atment property. Sales of a magnitude ap- $429 million, at acquisition cost, which

=broaching $1 billion (of which only 9 amounted to 38 percent of total exces s

~ .

_percent represented sales of real prop- property available that year,--;arty) places the Federal government

_

among the country's largest merchan- The rest of the property goes on sal edisers, with sales other than real estate to the general public. Three major sale sat a volume exceeding that generated methods include sealed bids, spot bids,in the same year by the U .S. firm ranked and public auction. Most property has

-18th in merchandising volume, These been used but some is unused, and thefigures do not include the sales of com- condition ranges from perfect to that

-

-missaries, post exchanges, or ship stores requiring extensive repair . A small por-of the armed force :, tion judged beyond the possibility of

37

repair is sold as scrap. GSA never guar-antees the condition of its merchandise ,urging buyers to inspect items carefullyin advance of purchase .

they may be utilized to further increase

_ -revenues.

During the 19th and early part of the20th century the use of public funds ,subiect to only very loose control, some-

interest Carningstimes led to scandals . Until about 1900,

Inevitably periods arise when govern- public treasurers commonly retained fo rments have on hand cash balances which their personal use interest earned on de -are in excess of their operating needs, posits of government funds, the theory

" -Such funds may be left lying idle, or being that the treasurer merely was

Table 1 4Collections from Rents, Royalties, and Sale o f

Property,,by Level of Government 1957 and 196 6

Year andRents and

Sale ofrovalties

propertylevel of government (millions)

(millions)

,: .1 .966-

Federal

_ $442

$ 944-State 387

39

;Local_ . ._

_ .~ n .a,

266

_ . .

_ :_

. ..

_ ._ .

_

.

.w :-

Total $829

$1,249

19 .57.Federal $151

$

387State 233

26

Rent of land and othe rreal propert y

Rent of equipment, etc .Sale of real propert ySale of equipment, etc .

n.a .

73

$384

$ 486

$208198

37$ 83

862

1957Royalties

79Rent of real property

24Rent of equipment, etc,

48Sale of real property

1 6Sale of equipment, etc .

37 1Source : Bureau of the Budget, Bureau of the Census .

38

M

Table 1 5Percent of State Total Financial Holdingsa in Cash

and DepositsFiscal 1957 and 196 6

tCash and deposits as

Number of state sin category

percent of tota lfinancial holdings lose

1867

Less than 10% 13

9Less than 20% 27

18:Less than 30% 35

27Less than 40% 43

36Median percentage 17.1%

28.4%

a . Includes Federal, state, and local securities as well >as private bonds, notes, mortgages, corporat e-

stocks, etc .'Source : Bureau of the Census.

responsible for the safety of the funds some jurisdictions remaining the sam eand any earnings represented a windfall or even worsening their position andGradually, beginning about 1930, offi- others showing marked improvement .eials began to handle public funds , with. The Advisory Commission on Inter -unproved ethics and skill . :governmental Relations has explored i n

In fiscal 1966 Federal, state and local some detail the question of how effe c

governments combined collected $2 .4 tively state and local governments man -

billion in interest earnings (exclusive age their funds, taking as an index cas h

of insurance trust holdings) . While only and deposits as a percent of total hold-

a very

mall percent of each govern- ings. Using the ACIR method, Table 15

-ment 's

general

revenue

from

own shows that the number of states with

sources (about 1 percent at the Federal relatively small percentages of thei r

revel, 2 percent at the state and local financial assets in cash and deposits

levels), interest earnings represent rev- :implicitly states which are effectivel y

enue which might have been wasted but utilizing idle cash balances—increased

for prudent management of funds . State over the period 1957-1966, and the

and local governments, sometimes criti- median percentage held in cash an d

cited for neglecting opportunities to deposits dropped from 28,4 to 17 .1 per-

earn interest, appear to have improved cent. In 1966 compared with 1957, four

their practices over the decade 1957- more states fell into the category of less

1966. One evidence of this improvement than 10 percent ; nine more, in less than

-lies in the fact that for both state and 20 percent; eight more, in less than 30

local

governments,

interest

earnings percent; seven more, in less than 40 per .

have risen from 1 percent of general cent .

revenue from own sources in 1957 to Some individual states made quit et

2 percent in 1966.1 Individual states and impressive improvements between 1957localities vary widely, of course, with and 1966, as shown in Table 16, The

1,

some of this increase doubtless may be attributableinterest earnings potential, we J, R. Aronson, "Th eAn Economic Problem of National Concern", Journal

to higher Interest rates, For a recent discussion of theIdle Cash Balances of State and Local Governments :of Finance, June 1968,

39

percentage of cash and deposits dropped however, the ratio increased by ten o rby ten or more percentage points in 17 more percentage points in the four statesstates, with six of these dropping by of Hawaii, Alaska, Alabama, and Rhodemore than 20 points . Iowa showed the Island .most dramatic record, dropping by 40 .8points. Other states with marked drops S

curl Assessments

include Missouri (37 .9 points), Missis- Special assessments represent a comsippi

(31 .7 points)., Wyoming

(28.7 pletely local issue . Between the turn ofpoints), Nebraska

(26,3 points)

and the century and 1930, they accounted fo rI

+lip

Florida (20.7 points) . At the same time, one-fourth to one-half of all municipa l

Table 1 6Change in Percent of State Total Financia lH.old:ingsa, in Cash and Deposits, by State

Fiscal 1957 -1966

Cash and

Number o fdeposits as %

percentage

statebof total hold-

points changed ,ings,19"

1907-198 6

:States decreasing percentageIowa 2.0%

-40.8Missouri 8.1 .

-37.9> Mississippi 39.3

, '-31.7Wyoming.Nebraska . :

9 .3

-26. 3Florida 14.9

_

.-20. 7Virginia 11.1

-

-19 . 6!Nevada 23.0-18. 6Louisiana 28.0

-18.4Tennessee 46.4

-14.6Colorado 15.5

:-1.5 .8Georgia 31.3

-13. 7;North Dakota 32.2

-12.6:New Mexico 13.9

-1.3.1Delaware 32.2

-12,6Kentucky 36.6

-12. 1Oregon 1.7

-10. 1

States increasing ;percentage,Hawaii 353

+17.4Alaska 61.5

+14.0Alabama

43.5

+13 . 7Rhode Island

27.8

+10.9

_

a, Includes Federal, state, and local securities as well as private bonds, notes, mortgages, corporat estocks, etc .

b. Confined to states changing by ten or more percentage points.Source : Bureau of the Census .

40

revenues . Following heavy defaults inassessment bonds during the 1930's, spe-cial assessments fell into disuse unti lafter World War 11. Their revenue sig-nificance today by no means approache sthat of other nontax sources, but specia lassessments nonetheless accounted for$529 million in 1966, an 84 percent in -crease over the figure for 1957 .

In general, a special assessment rep-resents a charge against property—rather than owners—for the explicit pur-pose of paying for a public improvemen tor service accruing to the property . Allstates allow their local governments toimpose special assessments, but the pur-poses for which assessments may belevied vary from state to state. The

.:major purposes including grading, pav-ing, sidewalks, bridges, sanitary sewers ,storm sewers, parks, extension 'of cityutilities, high pressure fire -protection,ornament?'. street lighting, and snowremov;:.

Very difficult problems arise in con-nection with determining the area towhich a particular improvement extend sand the method for allocating charges t oindividual property sites . Among themethods currently applied are frontageor area measurements and approachessimilar to those used in property taxassessment. 2

Public Lotteries

The two states of New Hampshireand New York now operate government

lotteries as a source of supplementar yrevenue. Advocated as a painless andeffective revenue raiser, the lottery inboth states has failed to approach thelevels of revenue originally predicted bysupporters . In New York, for instance ,overly enthusiastic advocates estimate dthe lottery would gross $360 millionannually. In fact, actual sales in the firs tyear of operation (fiscal 1968) totaled$62.4 million, about 17 percent of pre-dicted sales. Gross ticket revenue inNew Hampshire has steadily declinedfrom the $5.7 million collected in thefirst year (fiscal 1964) to $2.6 million .infiscal 1967 .

Thus experience in the two states ap-pears to demonstrate that the lotterycannot be relied upon as a major sourceof revenue. In the case of New York, netproceeds of $34 .3 million representedonly 0.8 percent of total tax collection sin the preceding year. Similarly in New'Hampshire, fiscal 1967 net proceeds of$1.1 million amounted to 1 .7 percent oftotal tax collections. Expenses, particu-larly for prizes, cut down gross revenu esharply. In New Hampshire the outlayfor prizes accounted for about one-thirdof ticket revenue ; in New York, approxi-mately 28 percent. Other administrativeexpense has consumed about 17 percen tof ticket revenue in New York and aboutone-fourth in New Hampshire . The re-sult has been that net proceeds equalonly 55 percent of gross proceeds inNew York and have ranged from 41 to59 percent in New Hampshire .'

2. For a more detailed discussion see William J . Shultz and C . Lowell Harriss, American Public Finance ,.8th ed ., Englewood Cliffs, Prentice-Hall, 1963, pp, 413.413 .

3. Some other miscellaneous revenue sources, generally of small revenue significance, have not been taken up i nthis chapter . These include seigniorage, escheat, fines, and parking fees, among others, The interested reade rmay find discussions of most of these sources in Schultz and Harriss, op. cit ., Chapter 21 .

41

Conclusion

Governments at all levels must con- hospitals, sewerage and sanitation, and"tend with continual demands for more airports ranged from 152 to 207 percent .and more publicly provided goods and Nontax receipts stem from an appar-services. The bulk of government ac- ently endless list of sources, and thetrvities of course will be financed by tax comparative importance of each type o frevenues. Over the past decade, how- nontax revenue source varies from one

:`ever, Federal, state, and local govern- level of government to the next. Itemsments have shown an inclination to rely ;looming large in the Federal picture in-increasingly on , a variety of `nontax -elude postal receipts, the sale of agri-sources. .cultural products under the Commodity

In fiscal 1966, trilevel receipts from Credit Corporation program, sale o fnontax collections represented the sec- property, income from rents and royal-ond .largest major source of governmen- ,ties, and interest income,

Importanttal collections,

totaling $34,2 billion. ''items at the state level include charge sMoreover, nontax collections have grown for education, highways, and hospitals ,more rapidly than tax collections over `interest income, and liquor store rev .

: : .: .the past decade, and by 1966 repre• enue. At the local level, emphasis focusessented a significant proportion of total 'on charges for education, hospitals, sew -general revenue from own sources. At erage and sanlitation,,interest and,,u . 'the Federal level, the proportion had income .reached 12 percent; at the state level,

. ;19 percent, #nd,at the local level, a8 per-The reasons for turning to nontax

cent.= sources are not confined to their revenue-

raising capacities . Charges in particular' Chart 4 shows at a glance that in the can have important economic effects,course of the past decade the relative Since fees and charges are basically gov- ;importance of nontax receipts has been ernment imposed prices, they can serveincreasing at the state and local level, the same important functions as thoseand possibly at the Federal level as well . performed by the ordinary price mecha -;Collections from some particular types nism in the commercial world . That is to'of nontax sources have been increasing say, in addition to generating revenue ,very rapidly over the past decade . For charges can act as a semi-automatic reg-instance, Federal charges for all kinds ulating mechanism with great potential

"

of services increased by more than 250 for results superior to those which migh tpercent; state charges for education by be achieved under purely political deci -232 percent, for highways by 172 per- sions. If a public "price" is set within acent, for hospitals by 140 percent, In- realistic range,

then the pressure ofcreases in local charges for education, automatic market forces can lead to im -

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provements in the organization provid- set, however, and the nature of many ofing the public good, as well as better the areas covered by fees and charge sresource allocation for the economy as tends to be such that the discipline o fa whole. On the other hand, public the market does not correct pricing mis-prices improperly set can lead to gross takes, or does so only after a very lon ginefficiencies and misallocations . The period. Cleverly used, charges can re-level of charges must be administratively duce many difficult problems encoun

Chart 4Collections from Charges and Miscellaneous Revenue

as a Percent of General Revenu eFiscal 1957 -1966

24%

Local

State

r

Federa l

10%

8 C/o

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

16% ;

14% .

♦ ~12% L ♦ .

1'

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tered in the provision of public good sand services, particularly in those areasin which the peaking of demand strainsthe capacity of existing facilities . Suit -able charges can also help to keep th edemand for public goods within reason -able bounds,

Nontax revenue sources other thancharges do not hold quite so interestin gpossibilities as economic regulators, bu tnonetheless do offer substantial revenu eopportunities if prudently managed .Rents, royalties, sale of governmen tproperty, and interest earnings all re-ceive more attention and care today than

ever before, although not all governmen -tal units at the state and local level smake maximum use of the potential ofthese sources .

In summary, it can be concluded that

Scharges, rents, royalties, sales of prop-erty, interest earnings, and other nonta xsources offer all levels of government a ninviting avenue for reducing pressure o ntaxes while still maintaining adequatestandards in the provision of publicgoods and services. It is not surprising,therefore, that more and more govern-mental units are giving full attention t othe possibilities latent in nontax revenues .

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