Are Development Impact Fees Legitimate?

According to 59% of cities and 39% of counties, yes [1]. Development impact fees are one-time charges applied to developers in order to offset the additional public-service costs associated with new development. Fees can be used to build water and sewer systems, roads, schools, libraries, and parks & recreation facilities, made necessary by the presence of new residents in the area [2]. However, the fees must have an essential nexus to the development at hand—they cannot arbitrarily be used for city infrastructure not directly related to the development [3].

The central idea behind development impact fees is that new developments should pay for what they cause or use, thus, relieving the tax burden placed on existing taxpayers. As stated in the University of Minnesota Center for Transportation Studies report, "...it is generally accepted as appropriate that all developers, regardless of their scale, should help bear the cost that their developments impose on the community."

Development impact fees in Minnesota have been rare, in part because state law neither allows nor prohibits the use of development impact fees, leaving them in legal limbo [4]. The primary reason cities avoid them, it seems, surrounds their legal legitimacy and the number of judicial challenges to them. One particularly interesting case in the Twin Cities area occurred in 1997, when Country Joe Inc., a contractor, challenged the City of Eagan's road connection fees [5]. Other similar cases are numerous [6].

Should Minnesota start using impact fees more regularly?
Yes.
Advantages of development impact fees include user equity, reduced municipal borrowing, controlling urban sprawl [7], and promoting proactive planning [8].

No.
Disadvantages of development impact fees include greater burdens on and less supply of affordable housing [9] (i.e., since developers redistribute the fees to the development, it increases the market price per unit), intergenerational equity issues (i.e., new vs. existing residents), and a complicated administrative process [10].

The current state of impact fees....
Due to the current economic downturn, many municipalities are considering reducing or eliminating development impact fees to encourage development, especially if the development will create more affordable housing and jobs [11]. Will that decision work? Ed McMahon, a senior resident fellow at the Washington, D.C.-based Urban Land Institute, believes reduced impact fees will not translate into increased development activity. “I don’t think these rollbacks will produce much new development. The reason development is not taking place has little, if anything, to do with development impact fees,” McMahon says. “It has to do with the marketplace; it has to do with the lack of financing [12].”

One must also consider whether or not eliminating development impact fees is a sustainable approach to managing a city. Are cities encouraging leapfrog development, thereby jeopardizing our natural resources? And the larger question.... what is the financial cost to the city if development impact fees are eliminated?

By Jill Townley