Developmental Impact Fees: Examination & Analysis

In order for growing communities to adequately serve the needs of increased residents and visitors, public infrastructure must also be built and maintained in order to support such growth. Although such improvements are critical for maintaining livability, cities are finding it increasingly difficult to pass these costs onto existing taxpayers. This is in part due to  taxpayers’ growing resentment toward increasing property taxes and to the decline in state and federal aid to local governments. These difficulties are a reality even in places that have adopted pro-growth policies and strategies. As a means of mitigation, localities are resorting to impact fees in a two-part effort to provide existing taxpayers with relief while simultaneously preparing the community to serve the needs of its growing population.



Although impact fees can effectively help localities shoulder the cost of growth, they are not without controversy. There are both positive and negative impacts of impact fees, as outlined below:

Efficiency: Impact fees, like most forms of user fees, are an efficient way to incorporate the cost of infrastructure improvements into the price of development. When used as a way for localities to fill a gap in funding for municipal services such as water, sewer, and roads, impact fees can be beneficial to the greater community as a means of protecting the property tax base from increases. However, the downside is that developers tend to push part or all of the impact fee onto the homeowner, which can have significant consequences on low-income and affordable housing developments.

Equity: Impact fees are frequently regressive due to the flat-rate structure. This disproportionately impacts lower-income residents because of developers' tendency to transfer the fee to the cost of the home. This inflates home prices and therefore diminishes the availability of affordable housing.



Adequacy: Contrary to the cries of developers, research shows that impact fees do not adversely affect development; rather, the desirability of the community outweighs building costs. Municipalities chronically underestimate impact fees and therefore do not charge enough to cover the full amount of costs associated with development. Therefore, this form of government revenue is not considered fully adequate.

Feasibility: Impact fees are highly visible: first, to developers on their balance sheets, and second to existing residents who appreciate the reduction in property taxes. Impact fees can be costly to administer and have recently been highly subject to legal challenges. Further, developers sometimes have the option to move their development to communities where impact fees either do not exist or are lower--a factor which can lead to urban sprawl.

RECOMMENDATIONS:
1. User fees should be accompanied by policies that provide for and incentivize low to moderate income housing. This could be most effectively implemented by expanding impact fees to include monies for the construction of affordable housing--a "special" charge levied on housing worth over a particular value.

2. In order to improve the equity of impact fees, jurisdictions should shift away from a regressive, flat fee to a progressive fee structure where impact fees are calculated based on the value of the new property. Although all property owners utilize the public infrastructure that impact fees provide for, the cost structure should be devised in a more equitable manner.