Pay As You Go: The American Experience

by Randal O'Toole

Table of Contents


User fees are an appropriate way of managing public land and resource agencies. User fees can play a much more important role than just offsetting tax dollars: They can give managers incentives to do better land and resource management by making managers more responsive to users. If the user fees are appropriately designed, they can also discourage managers from losing money on environmentally destructive activities.

An economic view of natural resources suggests that resources will be managed best if:

  1. Management is funded out of user fees, not tax dollars;
  2. Resource agencies are allowed to charge fair market value;
  3. Agencies are allowed to charge for all resources in their care, not just one or a few; and
  4. Actual agency funding is determined by the net incomes they produce, not by the gross.
To test these hypotheses, I have scrutinized more than 150 federal and state forest, park, wildlife, and other land and resource agencies. I have examined their budgets, followed the money to see where the fees that they collect go, and made general observations about the quality of on-the-ground management.

Among all of these agencies are many variations in funding and user fees, allowing me to test the first three hypotheses. However, no agency appears to be funded out of its net income, so I can't test the last hypothesis. I still recommend that resource agencies be managed according to all four of these rules.

America's Public Land and Resource Agencies

America's federal and state resource agencies were mostly created during the Progressive era (roughly 1890 to 1920), and those that weren't were created during the New Deal (1933 to 1940). These eras were characterized by a faith in government that is unusual in U.S. history, a belief that "scientific experts" could do a better job of managing resources than private individuals or businesses.

Led by often charismatic individuals such as Gifford Pinchot of the Forest Service and Stephen Mather of the Park Service, these "experts" believed that they could manage resources at a profit and yet do so sustainably and with environmental sensitivity (though they didn't use these words). The key point here is profit: Pinchot gained control of the national forests by promising Congress that he would "make them pay," while Mather believed that concessions income and park entrance fees would cover all park operating costs.

But it takes more than scientific expertise to earn a profit: It takes incentives. The most profitable companies today give their managers and workers incentives, such as profit sharing, bonuses, and stock options, to earn profits. Government agencies tend to operate under a very different set of incentives.

Most government resource agencies receive most of their funds from appropriations out of tax dollars. The incentives they face, then, are to please the appropriators. This makes them subject not to standard measures of profit and loss but to what I call the Laws of Pork and Bureaucracy.

The Laws of Pork and Bureaucracy

One Law of Pork, for example, is that the most valuable pork is the pork that goes to the states and congressional districts of the most senior members of the Senate and House appropriations committees. So the Park Service spends tens of millions of dollars on a second-rate rail collection called Steamtown while it neglects the ecological crises in many western parks.

Another Law of Pork is that resorts generate more pork than grizzly bears. So when the Park Service decided it had to close a Yellowstone Park resort in prime grizzly habitat, Congress said it could do so only if it built a replacement resort--which, as it happened, was also in grizzly habitat. After building the new resort, Congress changed its mind and said it couldn't close the first one after all.

Another Law of Pork is that timber generates more pork than recreation because timber sales concentrate jobs in the congressional districts in which the sales are located while recreation spreads jobs throughout the economy--more jobs, perhaps, but not concentrated in any particular district. So Congress rewards the Forest Service for environmentally destructive timber sales while it penalizes forest managers who would rather emphasize recreation.

Connected with the Laws of Pork are the Laws of Bureaucracy, the most important of which is that a bureaucracy always works to maximize its budget. Thus, the bureaucracy regards profits--that is, funds returned to the Treasury rather than retained by the bureaucracy for its own expenditure--as "losses" because it loses control of them.

This doesn't imply that the individuals within the bureaucracy are venal or wasteful. Most of the people who run America's natural resource agencies have good intentions and high ideals. But carrying out even the highest ideas requires money, and few managers will ever turn down money for projects that they think are worthwhile.

A second Law of Bureaucracy is that a bureaucracy evolves in its environment through a process of natural selection whereby those people who have ideals that happen to maximize the agency's budget tend to be promoted. After a surprisingly short period of time, the people running the agency tend to be very sympathetic to the goals of the funders--which usually are the legislative appropriators.

When combined with the Laws of Pork, the Laws of Bureaucracy mean that agencies are rewarded for losing money and penalized for earning profits. Once we understand this, the surprising thing is not that the Forest Service loses hundreds of millions of dollars on supposedly commercial timber sales each year but that it actually made a profit in two or, perhaps, three years in its history.

The Role of User Fees

User fees are a way out of the trap created by the Laws of Pork and Bureaucracy. Agencies funded out of user fees rather than tax dollars do not have incentives to please appropriators by building boondoggle projects on environmentally sensitive ground or by diverting funds from high-priority needs to projects in the districts of powerful legislators.

But just funding out of user fees is not enough. Agencies funded out of their user fees will undoubtedly earn a profit somewhere. When they do, the Laws of Bureaucracy dictate that they earn a compensating loss somewhere else. The loss-making activity might be an unnecessary road, an environmentally questionable timber sale, or below-cost grazing. Such cross-subsidies can easily be found in the resource agencies that receive part or all of their funds from gross user fees.

The solution is to fund agencies out of their net user fees: Audit the agency at the end of each year to determine its total receipts and costs. Give the difference to the agency to fund its next year's activities.

Agencies funded out of their net income will be subject to several new laws. First is the Law of Profits, which says that the agency should avoid any activity that loses money. That will automatically halt most of the environmentally questionable projects on public lands. The second is the Law of Responsiveness, which says that the agency will be most responsive to the users whose fees generate the most profits.

A third is the Law of Diminishing Returns, which says that no one set of users will dominate an agency because as more resources are devoted to a single user the marginal value of that resource use diminishes while the value of competing resource uses increases. Just as milk from a dairy is made into hundreds of products all competing for the same raw material, so will a broad range of user fees turn public forests, parks, and other public lands into true multiple use areas.

The worst case is if an agency is funded out of both tax dollars and the gross revenue from user fees from one of several resources. That gives the agency powerful incentives to lose money on the resource producing the user fees while it neglects or destroys other resources that may be more valuable but whose value isn't expressed in incentives to the agency. Unfortunately, that is the situation for many American resource agencies.

User Fees and the Park Service

When the national parks were first created, the only way of reaching them was by train and stagecoach. Most park visitors spent several days in the parks, and hotels were built by private concessioners to accommodate them. The parks and, after 1916, the National Park Service, charged those concessioners a fee.

Stephen Mather, founder of the Park Service, believed that concessioners fees would eventually be sufficient to fund park operations. He sought money from Congress mainly for capital improvements--and, as it happens, built many capital improvements with private donations.

People who entered the parks by car and didn't stay in hotels weren't contributing to park operations. So parks began charging an entrance fee to automobilists. In 1908, Mt. Rainier Park began charging $6 per car--about $100 in today's dollars. By 1915, more than half the parks were charging an entrance fee calculated to pay for each park's road system. Yellowstone's fees were the highest, at $10 per car--$140 today.

But then the Park Service ran up against the Laws of Pork, one of which says that anything worth selling has an even greater political value if it is given away or, at least, sold below market value. In 1917, Congress set all entrance fees at $2 per car, which--at $20 in today's dollars--is still about four times the current fees. Despite the reduction, at least one park--Crater Lake--reported a profit in 1924 and Mather confidently predicted that other parks would also pay for themselves.

Mather's business instincts disappeared from the Park Service when he suffered a stroke and was forced to retire in 1929. The Great Depression led Congress to spend huge amounts of money on job-creating activities, and the Park Service eagerly took all the tax dollars Congress would give it for park improvements. The agency hasn't come close to making a profit since.

Today the Park Service costs taxpayers more than $1.5 billion per year. While Congress allows certain parks to charge user fees, the budgeting process effectively denies park managers any benefits from those fees. Fee collections are also subverted by Congressional mandates to give free entry to people under age 16 and over 65 and to have a national pass which, for a mere $25, allows entry into all parks.

A 1993 Inspector General report found that, if parks charged everyone the legally authorized fees, they would collect more than five times what they were actually collecting. The report noted that many parks did not bother collecting fees and those that did only collected them part time due to "a lack of incentive because fees collected were sent to the U.S. Treasury rather than returned to individual parks."

The concessions fees collected by parks also go to the Treasury. In competitive situations, such fees are generally 10 to 12 percent of gross revenues. But park concessions are rarely competitive because the concessioners often own the hotels or other facilities located within the parks. So the Park Service often negotiates very low fees--1 to 3 percent of gross revenues--and has the concessioner "pay" the remaining fees in the form of in-kind services to the park such as construction or maintenance activities.

Many parks have had to close popular campgrounds for lack of funds. A 1995 report by the U.S. General Accounting Office found that park services were deteriorating on most of the dozen parks that it studied because the parks budgetary demands have increased faster than park appropriations. The report did not say so, but those increased budgetary demands are mostly due to "park barrel," new parks or park projects created to please members of Congress.

This year, Congress has loosened its hold on the agency somewhat, allowing parks to charge more and to keep more of what they charge. But the actual incentives that this creates will be determined by how the bureaucracy administers the revenues. Moreover, fees are still charged only for a few activities: concessions, campgrounds, and entry, but not of cyclists, backpackers, and numerous other activities.

A survey by the National Parks and Conservation Association found that 80 percent of the American public supported fees as high as $6 per person per day in the parks provided that the parks got to keep the funds. The association has lobbied hard for more fees to be kept by the parks on top of the appropriates they already receive out of tax dollars. In the long run, this will merely create the worst possible situation: funding out of gross receipts from a limited set of activities plus tax dollars.

The Park Service is already a top-heavy bureaucracy: Little more than half its budget is spent on the ground, and much of that is earmarked by Congress to favored projects on selected congressional districts. Funding the agency out of net fees rather than gross plus tax dollars won't solve all of the parks' problems, but it will take care of many of them.

The Forest Service and User Fees

When Gifford Pinchot took over the national forests and founded the Forest Service in 1905, he confidently predicted that he could manage the forests at a profit. But he also confidently predicted that the U.S. would soon suffer a timber famine. In fact, the country was really suffering from a glut of timber, and Pinchot soon found that there was little market for the trees in his forests.

Until 1920, the agency earned most of its user fees from grazing. By that time, the Park Service was hungrily eyeing the national forests as potential new parks. In its own defense, the Forest Service began promoting recreation as one of the "multiple uses" of forest management.

In those early days, the forests were as inaccessible to most people as the parks. This meant recreationists had to play to stay for several days. Rather than allows huge national-park-like hotels in the forests, the Forest Service leased small plots of national forest lands on which people could build "summer cabins." The revenues from these leases were probably the first recreation user fees collected by the Forest Service.

In 1960, Congress allowed the Forest Service to collect fees from national forest hunters and anglers--but only with the permission and cooperation of the state fish and wildlife agencies. The funds collected would be dedicated to fish and wildlife habitat improvements determined by the national forest and state agency. The Forest Service did not take advantage of this law for many years, and today collects such fees only in two or three states.

In 1964, Congress authorized the Forest Service, as well as the Bureau of Land Management and Park Service, to charge campground fees. The wording of the law effectively made it illegal to charge for most other individual activities such as picnicking, hiking, or swimming in the national forests. The Forest Service could charge for "special use permits," which included the summer cabins and commercial operations such as ski resorts and guiding services. It could also charge an entrance fee into national recreation areas.

But the agency wasn't allowed to keep any of these fees, so it had little incentive to collect fair market value or to cater to recreation interests. For example, fees for summer cabins remain well below fair market value, and the agency doesn't hesitate to put timber sales close to those summer cabins.

Under a 1930 law, the Forest Service could keep an almost unlimited share of the timber receipts that it collected. A 1978 law allowed the agency to keep half of all grazing receipts. Congress also regulated the fees for many activities, including grazing and recreation, well below market value. The Forest Service could only sell timber and oil & gas at fair market value, and could only keep receipts from timber and grazing.

This meant that the agency had powerful incentives to emphasize timber over all other resources and weak incentives to emphasize grazing over anything but timber. These incentives were reinforced by the Law of Pork which said that activities like timber sales made better pork than recreation.

In the mid 1980s, Congress allowed the Forest Service to keep 65 percent of the campground fees that it collects. This led to a brief flurry of innovation and improved campground management. But Congress was slow to actually appropriate the funds that managers were supposed to be able to keep, so the improvements faded away.

In 1993, Congress authorized the Forest Service to collect recreation fees on up to ten "concentrated use" recreation areas, such as popular hiking or picnicking zones. But again it failed to let the agency keep the fees, so the agency couldn't even find ten managers willing to try the experiment.

The Forest Service estimates that, if it were allowed to charge recreation fees, it could collect roughly $5 billion per year--which is five times what it now gets from all resources combined. The agency is probably overestimating recreation values, but

Although national forest timber sales have declined, the agency continues to lose money on most of the timber it sells and many environmentalists want to halt national forest sales altogether. A better idea would be to allow the agency to collect recreation fees and to fund the agency out of its net income--from timber, recreation, and everything else.

State Fish & Wildlife Agencies and User Fees

As far as user fees go, state fish & wildlife agencies have fared better than federal land agencies. Ironically, this is mainly due to a federal law passed in 1937 which diverted an existing tax on guns and ammunition to wildlife habitat. The law delegated the funds to the state wildlife agencies.

One of the sponsors of the law had been on a state wildlife commission and he knew that many state legislatures would simply deduct the federal funds from state appropriations. So he added a provision requiring that states receiving federal habitat funds also dedicate all hunting license revenues to the wildlife agencies. In 1950, a similar tax on fishing equipment was dedicated to fish habitat with a similar provision for state fishing license revenues.

As a result, most state fish & wildlife agencies have historically been run as non-profit organizations--allowed to keep all of the fees they collect plus the federal habitat funds. Few received any appropriations from state taxes. While this is not quite my ideal of funding out of net income, it resulted in far better management than the federal agencies that are funded mainly out of tax dollars.

With license fees as an incentive and federal habitat dollars as a funding source, the states produced one of the most remarkable wildlife recovery programs in history. Species such as elk, bighorn sheep, and pronghorns were all nearly extinct in 1920. Today they all number in the hundreds of thousands if not millions.

State fish & wildlife agencies still suffer from regulation of license fees by the state legislatures. In states that can attract out-of-state hunters, legislatures insist on very low fees for in-state licensees with the expectation that high fees for out-of-state licensees will make up the difference. The Idaho Fish and Game Department says that it could earn a lot more revenue from out-of-state hunters if it could reduce the price, but reducing the price would force it to reduce the number of hunting permits available to in-state hunters.

Other states find that legislative restrictions on fees are hampering their ability to manage wildlife. At one time, the Louisiana Department of Wildlife and Fisheries was able to use oil & gas revenues on its wildlife refuges to cross-subsidize its hunting and fishing programs. The oil & gas revenues have declined with falling energy prices, and the agency has run deficits of $5 million per year for several years running. Since the legislature would not let it increase hunting and fishing fees, it finally had to let many of its employees go.

Since state license revenues only came for game fish & wildlife, the states tended to neglect other species. Sometimes they even went out of their way to exterminate the "trash fish" and other species that were in the way of the "desirable" species. Several species now listed as threatened or endangered were once treated this way.

Charges in the 1980s that agencies were neglecting nongame species led the agencies to seek new sources of revenue. Some states dedicated sales taxes on sporting goods other than hunting and fishing equipment to nongame programs. Other states dedicated lottery funds, income-tax checkoffs, or other funds to such programs. The results have been spotty, partly because funding has often been inadequate and partly because there is no connection between users and the agencies as there is for hunting and fishing.

Missouri has one of the nation's best funded wildlife agencies. In 1980, voters approved a 0.125 percent sales tax that would be dedicated to the Missouri Department of Conservation. This more than doubles the amount the agency would have for wildlife if it were funded out of license fees and federal habitat funds. But because there is no collection with users, there is little oversight for how the funds are spent or any guarantee that they are spent effectively or on the species that need it the most. A chunk of the sales tax money, for example, is spent subsidizing the state's timber sale program, which is also administered by the Department of Conservation.

State Parks and User Fees

Among America's natural resource agencies, state parks tend to be in the worst financial shape. Legislatures have regulated park fees and funded the agencies out of tax dollars. But when the states have had budget crises, the parks were among the first to be cut. Today, more and more park agencies consider themselves to be in a "crisis" and some are even talking about selling parklands to fund their other parks.

At the same time, a few state park agencies are doing well because their legislatures took their hands off of local park management at the same time as they cut park budgets. Innovative managers found ways to cut costs and boost revenues leading to actual improvements in the parks at lower or, in some cases, no cost to taxpayers.

The premiere examples are the park agencies in New Hampshire, Vermont, and Texas. Since 1990, New Hampshire and Vermont park agencies have been funded solely out of user fees. The agencies boosted park user fees and pioneered several ways of reducing costs. For example, New Hampshire eliminated nearly all garbage collection costs by simply giving people trash bags and asking them to pack out their own trash. It turned out that this resulted in cleaner parks than before since there were no unsightly piles of trash around garbage barrels.

The Texas parks story is even more innovative. Like New Hampshire and Vermont, Texas parks no longer receive any general funds from the state, although they do collect a small tax on sporting goods. When the legislature told the park agency that it would cease providing general funds, the agency thought it would have to close at least 15 parks.

Instead, it offered park managers incentive contracts. If the managers were able to reduce their costs, they could keep a percentage of the money saved for their next year's budget. If managers could increase revenues, they could keep a percentage of the revenues for their next year's budget.

The agency tried this on a few parks at first and the system was so popular that most other parks wanted to join in. As it turned out, it did not close a single park and is now funded almost entirely out of user fees.

Attempts by other park agencies to increase user fees have not always been successful. When Iowa attempted to increase fees, public protest led the legislature to demand a reduction. In exchange, the legislature promised to provide supplemental funding--a promise that was soon forgotten. But unlike Texas and New Hampshire, the Iowa state budget apparently never reached a "crisis" that forced the legislature to completely defund its parks.


The variety of experiences in the more than 150 state and federal land and resource management agencies confirm some, but not all, of my general proposals about user fees.
  1. Resources are managed better if the agencies are funded out of their fees rather than tax dollars. This is particularly demonstrated by the good game management provided by the many state wildlife agencies that receive no tax dollars and by the New Hampshire and Vermont state park agencies.
  2. Resources are managed better if agencies can charge fair market value. State park and wildlife agencies that are allowed to set their own fees are in the best financial shape and receive few complaints from users about high fees. Agencies whose fees are regulated by the legislatures tend to be in a state of perpetual crisis and neglect many important parts of their missions.
  3. Resources are managed better if agencies can charge and keep fees for a broad range of uses rather than just for one use or a limited range of uses. The Forest Service is much more responsive to timber purchasers than to recreationists because it can charge market value for timber but not recreation.
What these experiences haven't shown is that agencies funded out of net income are less likely to undertake environmentally damaging money-losing projects than agencies funded out of gross income. So far as I know, none of America's state or federal resource agencies are funded out of their net income. The closest is a few state forest agencies that are funded out of a percentage of their gross income and are required by law to earn a profit for state and local schools. Several of these agencies do a good job of avoiding below-cost sales, but they are not necessarily as profitable as they might be if they were funded out of net income.

Experiences in state park systems suggest that dramatic changes in public land user fee policies will only come about when the Congress or state legislatures that oversee the public agencies reach a serious budget crisis. "Shock therapy," similar to that applied to many eastern European economies, may be the best solution for natural resource management. The other alternative of ever more control by the legislatures--an alternative used by many countries in the former Soviet Union--will be highly detrimental to our natural resources.

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