A Guide to Impact Fees and Housing Affordability

By Arthur C. Nelson, Liza K. Bowles, Julian C. Juergensmeyer and 3 more

Impact fees are one-time charges that are applied to new residential developments by local governments that are seeking funds to pay for the construction or expansion of public facilities, such as water and sewer systems, schools, libraries, and parks and recreation facilities. In the face of taxpayer revolts against increases in property taxes, impact fees are used increasingly by local governments throughout the U.S. to finance construction or improvement of their infrastructure. Recent estimates suggest that 60 percent of all American cities with over 25,000 residents use some form of impact fees. In California, it is estimated that 90 percent of such cities impose impact fees.

For more than thirty years, impact fees have been calculated based on proportionate share of the cost of the infrastructure improvements that are to be funded by the fees. However, neither laws nor courts have ensured that fees charged to new homes are themselves proportionate. For example, the impact fee may be the same for every home in a new development, even when homes vary widely in size and selling price. Data show, however, that smaller and less costly homes have fewer people living in them and thus less impact on facilities than larger homes. This use of a flat impact fee for all residential units disproportionately affects lower-income residents.

The purpose of this guidebook is to help practitioners design impact fees that are equitable. It demonstrates exactly how a fair impact fee program can be designed and implemented. In addition, it includes information on the history of impact fees, discusses alternatives to impact fees, and summarizes state legislation that can infl uence the design of local fee programs. Case studies provide useful illustrations of successful programs.

This book should be the first place that planning professionals, public officials, land use lawyers, developers, homebuilders, and citizen activists turn for help in crafting (or recrafting) proportionate-share impact fee programs.

• Language: English
• Publisher: Island Press
• Release date: Jun 22, 2012
• ISBN: 9781610910842

Book preview

Builders.

Introduction

On January 9, 2003, Lincoln, Nebraska’s mayor Don Wesely stood on a bumpy, graveled portion of West Adams Street that leads to new homes in northwest Lincoln to drive home his attitude on the need for impact fees.

The washboard-like graveled West Adams Street is an example of how big the funding gap for extending arterial streets really is and why impact fees are needed, said Mayor Wesely. The City has fallen so far behind that the City is not scheduled to pave this street for another six years. It’s less safe than a paved road, it’s dusty, and it’s a daily problem for the residents. This is the wrong way to build our community. If impact fees had been in place, West Adams would have been paved much sooner because the street fees would have helped pay for the improvements.

Continued Mayor Wesely: Critics have said impact fees will stop growth. What stops growth is uncertainty and the inability to pay for new streets, water and sewer systems and parks. Impact fees are not the whole solution, but they are a fair way to share the costs between the new development and the taxpayer.

Mayor Wesely’s comments echo those of many city officials who want to find a way to pay for growth. Impact fees have now become a fact of life in an ever-increasing number of communities. Originally a phenomenon of fast-growing coastal communities in Florida and California, the use of such fees has now spread to mid-America. Increasingly, impact fees are seen by local officials as the best option available.

Impact fees—onetime charges on new development—provide revenue for new or expanded infrastructure to support new development. Impact fees take the form of a predetermined monetary payment—a fee—and are generally levied against developers to fund capital expansion of large-scale public facilities and services. Increasingly, such fees play an integral part in enabling local governments to cope with the many burdens of rapid population growth, such as the need for new parks, roads, schools, jails, public buildings, sewer and water treatment facilities, and public safety (fire, police, and emergency medical service) facilities.

Impact fees have become widely used, especially in growing regions, for three primary reasons:

Locally elected officials are increasingly loathe to ask voters, and voters are generally unwilling, to raise their taxes in part to help provide increasingly higher levels of new facilities demanded by new development.

State and local governments have municipal financing constraints, including state constitutional limits on property tax rates.

State and federal governments provide little financing for infrastructure to local governments.

While, in theory, many better ways exist to finance infrastructure, in practice impact fees often become the path of least political and legal resistance.

In one form or another, impact fees now exist in nearly all U.S. states and are a common technique for generating revenue for capital funding necessitated by new development. To date, nearly thirty states have enacted impact fee enabling legislation, and in most other states, impact fees are enacted pursuant to home rule powers or to individual local government enablement.

Historically, a primary function of state and local governments has been to construct, operate, maintain, and improve the basic physical infrastructure of American communities. However, as a result of three significant events in American history, this traditional approach began to break down. The first of these events was the sharp rise in inflation in the 1970s and the decimation of the purchasing power of fixed-base taxes, such as the motor fuels tax. The second factor leading to the breakdown of the traditional approach was the general hostility to the taxation of real property, thus forcing local governments to look elsewhere to fund the ever-increasing demands of constituents. Third was the failed expectation that the federal government would pay a significant portion of infrastructure costs. Although, historically, the federal government has paid little or no portion of such costs, many environmental mandates enacted in the 1970s, especially regarding clean water, did initially include significant federal financial support. Many communities began to rely on these funds just at the time the federal government returned to a more traditional role of limited financial support for local infrastructure. Because these factors were occurring at a time when the pace of urban development was increasing, especially in fast-growing communities in Florida and California, both the demand for and the cost of investment in public infrastructure began to climb while at the same time the available financial resources were falling. As a result, there arose an increasing need for investment concurrent with declining means.

Florida, especially, presented a financial perfect storm. Population was growing rapidly, home buyers were expecting higher levels of services, and lessening state and federal support produced ever-increasing demands on localities. An ever increasing share of the responsibility to pay for those and related public investments fell directly on local jurisdictions by default. To assume control of providing these infrastructure needs, local governments were forced to pay the associated costs, commonly by raising local property taxes. At the same time, they were hit by the taxpayers’ revolt. Local elected officials faced growing public demand to increase public services without increasing taxes. Impact fees arose from this environment as an acceptable political alternative to solve the need for financing. Because of their intrinsic attractiveness to local governments, their use for a growing number of facilities and services spread rapidly.

The effect of impact fees on housing affordability and availability is contested. Some recent studies show that carefully tailored impact fees may not necessarily reduce the supply of housing that is affordable and in fact may increase it. However, impact fees are often criticized for adversely affecting housing affordability, by either raising prices or reducing supply, or both. Vicki Been observes:

Impact fees also can be abused, either to exclude low-and moderate-income residents or people of color from communities, or to exploit new homebuyers, who have no vote in the community. They also can be unfair to those caught in the transition from other forms of infrastructure finance. By careful attention to the myriad of issues . . . researchers can help local governments seize the potential impact fees offer for promoting more efficient development patterns while minimizing any negative effects impact fees might have on the affordability of housing and the distribution of housing opportunities to all residents.¹

Her concluding observation is the very purpose of this book: to educate practitioners on impact fees and present recommended approaches that can reduce potentially adverse effects of impact fees on housing affordability. Two approaches are recommended. The first is to calculate impact fees based on house size in square feet because, as noted by the National Association of Home Builders, as the size of the house increases so does the number of occupants, at least up to a certain size. The second is to waive or defer impact fees on affordable housing, as is done in several communities around the nation.

A central theme in structuring and implementing impact fees of all types is the concept of proportionate share, which dates back to at least the 1970s and has been generally accepted. Impact fees are legally prohibited from charging developments more than a proportionate share of the cost of new facilities. This is closely related to the very definition of impact fees, which are distinguished from taxes or general charges and are required to be based on actual or projected expenditures. Charging proportionate shares is also frequently supported from a policy and fairness standpoint. Ensuring that impact fees do not charge more than the proportionate share is fair and equitable and protects affordable housing from paying a disproportionate share.

Notwithstanding the broad, underlying support for proportionate share fees, the concept leads directly to significant questions and complications. In reality, while the courts have made it clear that lawful impact fees must reflect proportionate shares, they have also accepted very relaxed approaches, including the common use of impact fees set at average levels and then applied to every case in a community. In other words, as long as the process achieves an overall, general correspondence between costs and fees, it could be legally accepted as an impact fee. Yet, using flat fees to pay costs that do not vary with unit size has had serious drawbacks because it charges smaller homes and apartments disproportionately large shares of costs and charges larger homes and apartments disproportionately smaller shares. Unlike real property taxes, flat fees tend to have a regressive effect—that is, they fall more on those with lower incomes than on those with higher