Does User-Charge Financing Reduce Expenditure Levels for the Charge-Financed Services?

Abstract

Spurred by the tax and expenditure limitation movement of the late 1970s, user charges have grown to become a major source of revenue for local governments. Both theory and literature propose that a well-designed user-charge structure could reduce spending on the charge-financed services by strengthening the relationship between service and payment. This study empirically tests such a possibility by examining the level of expenditure for sewer and parks and recreation services. Using a panel of 686 American cities for the sewer services and 715 cities for the parks and recreation services between 1972 and 2004, this study finds evidence that greater reliance on user charges to finance government services leads to a reduction in municipal expenditures.