Basic Concepts of Developmental Impact Fees and Data In Support of Their Use
By: Jennifer Valentine| Environmental Impact
Americans are known for our “supersize” preferences. Whether it’s a Cadillac Escalade, a third-pound burger, or a McMansion, we tend to like it BIG. Many communities are still expanding in this vast country of ours; but that expansion comes with a price. As new, and sometimes larger, homes are built, more strain is placed on the core community services such as schools, sewer, and infrastructure. When it comes to who will pay for these new demands, there are no easy answers. Property taxes are designed to meet a community’s current needs, not cover future growth demands. Impact fees are one tool communities use to manage costs. In today’s economic climate, raising taxes is akin to political suicide. But for communities without these provisions, taxpayers bear an increased burden for expanding town services. A vicious circle of taxation to support development can occur, and a sustained pattern of increases in property taxes could eventually, negatively affect the very property values of the homes being developed.
An impact fee does exactly what its name implies – an impact, a financial requirement, is a charge on new development to pay for the construction or expansion of off-site capital improvements that are necessitated by and benefit the new development. They are not a tax. Impact fees are levied by a different branch of municipal government as part of the development approval process. Requiring an impact fee to provide adequate public facilities is similar to meeting site planning and zoning requirements.
Three conditions must be met to satisfy the legal basis for assessing an impact fee. According to impactfees.com, an online impact fee resource provided by Duncan Associates of Austin, Texas, impact fees must meet the "rational nexus" and "rough proportionality" tests. First, there must be a reasonable connection between the "need" for additional facilities and new development. Second, it must be shown that the fee payer will "benefit" in some way from the fee. And third, calculation of the fee must be based on a proportionate "fair share" formula.
Impact fees first came into vogue in the 1970’s as aid for local infrastructure at the state and federal levels dwindled. Their popular use spread throughout the West and South. “According to recent national surveys, about 60 percent of all cities with over 25,000 residents and almost 40 percent of all metropolitan counties use some form of impact fees. In California and Florida, the extent of cities and counties using impact fees is at 90 and 83 percent, respectively.” (Duncan Associates, 2008) As of 2007, 27 states, mostly in the West and South, authorized some facilities eligible for impact fees. (Duncan Associates National Impact Fee Survey, 2007) The most comprehensive assessments were found in California, Colorado, Florida, Hawaii, New Hampshire, Rhode Island, and Vermont.
In a 1998 study of the rationale and practice of impact fee use, James Frank and Paul Downing found four community characteristics that may induce the use of impact fees. First, there is a large population base. Second, the community is experiencing moderate to rapid growth. Third, the community already faces high property taxes. Finally, there is large capital investment to maintain such as sewers and roads.
Although at first glance, the idea of impact fees may seem counterintuitive to growth and development. The very opposite has been found to be true. Nelson and Moody (2003) suggest, when communities cannot afford to develop land, an impact fee allows both builders and communities to profit. A builder gains access to developable land, and towns benefit from properly planned expansion without increased taxation.
Duncan Associates (2008) asserts many builders and developers support impact fees because they add predictability to the development approval process and create a "level playing field" between them and their competitors. Properly managed growth can have positive effects on a local economy. Empirical studies found that house prices rose in both Florida and California after imposing impact fees. (Singell and Lillydahl 1990).
Proponents of impact fees believe they are necessary and useful financial instruments for municipalities to fund their basic services. In their absence, burgeoning communities may not be able to sustain growth. Industry surveys show fees: fund vital infrastructure improvements, increase the supply of buildable land, improve efficiency and predictability in the development process, and indirectly promote local employment. When forced to choose between funded growth and investment, and increased taxes, municipalities in growing regions that institute impact fees may experience a sustained prosperity than communities in such regions that do not have them. Detractors have valid concerns related to equitable distribution of fees and development as well as additional administrative start-up costs to manage impact fee assessment. However, each community needs to find its own balance between development and taxation because no one solution is applicable to every community’s needs.
Duncan Associates. 2007. National Impact Fee Survey. p. 3.
Duncan Associates. 2008. General Frequently Asked Questions. 18 March 2008. <http://www.impactfees.com/faq/general.php#>.
Frank, James E., and Paul B. Downing, 1988. Patterns of Impact Fee Use. In Development Impact Fees: Policy Rationale, Practice, Theory, and Issues, edited by Arthur C. Nelson. Chicago: Planners Press, American planning Association, 3- 21.
Nelson, Arthur, and Moody, Mitch. “Paying for Prosperity: Impact Fees and Job Growth.” Brookings. Jun. 2003. <http://www.brookings.edu/reports/2003/06metropolitanpolicy_nelson.aspx>.
Singell, L.D. and J.H. Lillydahl. 1990. An empirical examination of the effect of impact
fees on the housing market. Land Economics 66.82-92