Issue Brief: Credit Card Fees and SurchargesUpdated January 2009
The Government Finance Officers Association (GFOA) supports the use of credit cards for payment of state and local government taxes, fines and other charges as an option for citizens and as a means of accelerating payment to these governments. GFOA strongly urges credit card vendors to allow state and local governments to collect usage fees for involuntary assessments paid by credit cards. GFOA supports legislation, if necessary, to require credit companies to permit state and local governments to pass onto card users the surcharge and/or usage fees.
Background
In an effort to maximize revenues, state and local governments are continually looking for new ways to cut the cost of collecting and processing payments from citizens and to expedite deposit of these payments. In addition, many citizens are requesting the convenience and flexibility that the use of credit cards permits for payment of government-related expenses.
Many states have passed legislation authorizing the acceptance of credit cards for government payments. The most frequent uses are for fines, motor vehicle fees, recreation services and parking fees. Some jurisdictions also accept credit cards for tax payments. A provision of the Taxpayer Relief Act of 1997 (P.L. 105-34) authorizes payment of federal income taxes by credit card but prohibits the federal government from paying fees or surcharges.
As a matter of policy, the major credit card companies have generally not allowed governments or businesses to pass the usage fees imposed by credit card vendors, normally between 1.5 and 2 percent of the amount charged, onto citizens and customers who use this payment option. State and local governments, however, are charged with the collection of taxes, fines, forfeitures and other involuntary assessments and, unlike businesses, are unable to adjust their “pricing” to cover the costs of collection, nor permitted to deduct such usage fees from the amount of taxes owed.
State and local governments have responded to these prohibitions on collecting surcharges in a number of ways. Some use outside vendors to process credit card transactions, some are working within programs recently established by the credit card companies for governmental entities, some absorb the fees themselves and others have ceased use of credit cards altogether.
The credit card companies have granted a number of exceptions (referred to as “unique transactions”) from their general prohibition on collection of surcharges. Some of these have been granted on an ad hoc basis, but others are specifically enumerated. Among these exceptions are transactions at gambling casinos and truck stops. (Payment of taxes has also been noted as an exception, but charging for this purpose has not been permitted.) All that is required is that card users be notified in advance that the fee will be included in the total transaction amount. State and local governments have questioned the criteria used in granting exemptions at these establishments while essentially denying users of governmental services the same opportunity. The major credit card companies have consistently maintained that (1) cardholders should not have to pay for the use of credit cards, since it is a substitute for cash and (2) the use of the card is a value to service providers. The card companies also cite the benefit to governments in cost savings resulting from more efficient and timely payment. In fact, cardholders frequently do pay for the use of a credit card in the form of an annual fee; and, although retailers may benefit from discretionary spending or impulse buying as a result of credit card use, government charges are usually quite limited and specific. Finally, the resulting cost savings do not offset the cost of the surcharges imposed. Credit card companies assert that their processing costs are simply another cost of doing business (albeit a higher one) and that the fees would fall disproportionately on low-and moderate-income citizens. They have characterized the passing on of surcharges as a hidden tax on a jurisdiction's citizens.
Outlook for 2009
In the 110th Congress, the House Judiciary Committee’s Chairman John Conyers (D-MI), spoke of his concerns and held hearings about the unfair burden credit card fees impose upon consumers and merchants. He noted that $26 billion in fees were collected in 2006 and questioned whether credit card companies engage in anti-competitive behavior. Private sector businesses that must use credit cards within their business have been outspoken about these practices, and some have developed a Web site to educate the public on this issue – www.unfaircreditcardfees.com. While the hearings and testimony presented discussed the problems with interchange fees, issues specifically relating to state and local governments were addressed. We see Congressional attention to this matter as a positive step, although it is uncertain if Congress will work on legislation addressing interchange fees in 2009.
Furthermore, the credit card companies are looking for ways to work with governmental entities and address fee issues in a manner that is helpful to all parties – governments, taxpayers and the companies themselves. GFOA will work closely with its state and local government partners, including the National Association of State Auditors, Comptrollers and Treasurers to advocate for overhaul of interchange fees, both directly with the credit card companies and through legislative means. Related GFOA Public Policy Statements Other Resources GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email
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