Report

Paying for Prosperity: Impact Fees and Job Growth

Arthur C. Nelson and Mitch Moody

Executive Summary

Growth costs money. And increasingly many municipalities, confronted with tax-averse electorates, have turned to impact fees—one-time charges against new development—to pay the costs of growth. Traditionally, these costs have been financed by property taxes. However, those revenues have proven mostly inadequate to fund the roads, water and sewer infrastructure, and schools required by new residential and commercial development.

Impact fees, though, are not universally accepted. Conventional wisdom among some private interests and public officials is that impact fees constrain local economic development, serving as a de facto “tax” on capital, stifling investment, and driving job growth to other fee-free jurisdictions. Supporters argue impact fees act as an investment in the community, spurring economic growth through the timely provision of new infrastructure and the expansion of buildable land. Given that impact fees often pay for public infrastructure projects, understanding the relationship between impact fees and local economic development, defined here as local job growth, is key.

This report addresses the controversy around impact fees by reviewing the academic literature concerning the effect of impact fees on employment and the economy generally. In addition, the report presents a new analysis of the relationship between impact fees and job creation by assessing impact fee and economic data, assembled for the period 1993 to 1999, for the 67 counties of Florida. Overall, the paper finds that:

  • Property tax revenues increasingly fail to cover the full costs of the infrastructure needed to serve new development. More and more, political resistance to property taxes compromises the conventional way to pay for infrastructure needs brought on by new development. Consequently, new property values would have to be very high or property tax rates raised across the board to pay for the full array of infrastructure needs For example, one study of a rapidly growing city in Georgia in the 1990s found that the city faced a 50 percent shortfall in funding the new infrastructure demanded by new development and would need to raise $90 million more than it projected in total revenues from all state and federal transfers and property taxes.

  • Impact fees, like user fees, offer a more efficient way to pay for infrastructure than general taxes, and ensure benefits to those who pay them. Academic literature suggests that the aggregate benefits of impact fees improve efficiency in the provision of infrastructure. While impact fees often do not reflect the full price of infrastructure improvements, fees do make the economic linkage between those paying for and those receiving benefits more direct, and so promote economic efficiency. The obvious direct economic benefits include the actual infrastructure investment, such as new roads, new schools, and new water and sewer extensions. Indirect benefits include improved predictability in the marketplace, knowing when and where infrastructure investment will occur, and that all developers are treated equitably.

  • Impact fees increase the supply of buildable land. In the absence of impact fees, local governments may not have the revenue necessary to accommodate growth. With impact fees, they gain necessary infrastructure¾ water, sewer, drainage, and road facilities¾ to open new parcels of land development. One study also found that impact fees may reduce uncertainty and risk for developers by giving them a reasonably predictable supply of buildable land.

  • Impact fees have complex effects on housing prices. One particularly thorough study of the effect of impact fees on housing prices found that fees reduced land prices by the amount of fees paid but also raised finished house prices by about half again the fee amount. One interpretation is that while impact fees lower raw land prices as predicted by conventional economic theory, the amount of the fee reflecting infrastructure value is recovered in the sales price. Additionally, the increment above the fee represents the value of the infrastructure as a whole and/or the certainty perceived by the market that facilities will be provided at a desired level and quality of service (i.e. no congestion) regardless of growth pressures.

  • Impact fees do not slow job growth. In this study, we find, at minimum, that impact fees are not a drag on local economies. At most, impact fees are the grease that helps sustain job growth in the local economy.

While impact fees will continue to draw detractors, this paper shows that impact fees are a practical and valuable tool for financing local infrastructure needs. Without them, growing communities may not be able to sustain growth. In short, impact fees can directly fund vital infrastructure improvements, while increasing the supply of buildable land, improving predictability in the development process, and indirectly promoting local employment at the same time. Faced with the growing demand for investment and the public resistance to tax increases, localities in growing regions that institute impact fees may become more prosperous in the long run than communities in such regions that do not have them.

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