Policymakers at the state and local level are increasingly interested in using market-based pricing mechanisms as regulatory tools. For example, at the state level, several states have recently considered state-level carbon pricing, while at the local level, municipal governments are increasingly turning to stormwater remediation fees to pay for the treatment of municipal runoff required by the Clean Water Act.

These regulatory programs are inspired by the insight of English economist Arthur Pigou, who suggested governments could price social costs into market transactions by imposing a tax. Such policies, however, are frequently subject to state court litigation challenging them as unlawful taxes. State law restricts both state and local governments’ ability to enact taxes, but similar restrictions are often not in place to limit the enactment of regulatory actions or user fees. Unfortunately, state courts have struggled to appropriately classify these fees under existing state law doctrines.

Such legal instability makes state and local governments less likely to adopt such policies, even when there are strong arguments for doing so. This Article takes a critical look at current state law governing the distinction between user fees and taxes. This Article then argues that Pigovian levies do not fit neatly into either legal category under the definitions in place in most states. As a result, this Article proposes reforms to state user fee definitions that would bring needed clarity to user fee doctrine. Specifically, this Article suggests state courts recognize separate categories of user fees. One such category, price-based regulatory tools, would allow governments to impose Pigovian charges as user fees so long as the charge was roughly commensurate with the externality costs or with the governments’ expenses in abating the externality.

I. Introduction

II. User Fees v. Taxes ... A. The Variety of User Fees ... B. Legal Differences between Taxes and User Fees ... 1. Political Process Restrictions ... 2. Restrictions on Local Taxing Authority ... 3. State Law Requirements of Tax Uniformity ... 4. Tax-Exemptions ... 5. Federal Law … C. The Doctrine Does Not Readily Distinguish Taxes from User Fees ... 1. Single-Factor Approaches ... 2. The Multi-Factor Approach ... 3. The California Approach ... 4. Federal Court Approaches

III. Pigovian Taxes v. Pigovian User Fees ... A. Emissions Taxes ... 1. Emissions Taxes in Theory ... 2. Emissions Taxes in Practice ... 3. Emissions Taxes under State Law ... B. Stormwater Remediation Fees ... 1. Stormwater Remediation Fees in Theory and Practice ... 2. Stormwater Remediation Fees under State Law

IV. A New Way Forward ... A. The Need for Reform ... B. The Proposal ... 1. Classic User Fees ... 2. Traditional Regulatory Fees ... 3. Price-Based Regulatory Tools ... C. Problems with the Proposal ... 1. Greater Revenue Authority Is Undesirable ... 2. Voter Preferences/Constitutional Interpretation … 3. Measuring Externality Costs

V. Conclusion