Tax Analysts Blog

Feeling the Impact of Impact Fees

Posted on May 1, 2013

I have a running joke with another editor at Tax Analysts that when news gets slow in the state tax department, we can always cover impact fees. The topic often comes up during July and August, which are notoriously slow months for state tax news. I distinctly remember writing about impact fees in Nebraska in late summer a few years back. So you can imagine my surprise when opening The Wall Street Journal on the last Monday in April and seeing a story on impact fees in Pennsylvania on page three of the front section.

The story addressed the amount of money the state has collected from an impact fee imposed on gas drilling activity. The impact fee is based on natural gas prices. “When the price of natural gas is between $2.99 and $5.00, the fee is $50,000 a well during the first year of production,” the story says. Pennsylvania collected a whopping $204 million last year and distributed more than half of that to local governments.

While not front page news, impact fees are frequently used by local governments. A Google news search for “impact fees” came up with a surprisingly large number of recent hits. But then again, it’s not really a surprise that impact fees are so popular among local governments, as they are a relatively good means of financing infrastructure and they offer localities a viable means of financing the services necessary for the increased growth localities generally want to encourage. That is, growth brings new jobs, rising home values, and greater diversity of choices. All things localities want. But with growth comes the added need for local infrastructure and services. Those include not only streets and water facilities, but fire stations, libraries, parks, and city halls.

Local budgets are typically stretched tight and are unable to handle increased expenditures. Unfortunately, a local government's general funds do not necessarily increase in proportion to growth. The result is often increased taxes without increased services. Impact fees offer localities a means to recover some of the costs associated with growth. But the fees do not typically cover all of the expenses from infrastructure upgrades. Municipalities are often just supplementing their budgets with them. Overall, impact fees facilitate a better quality of life for the entire community without imposing a higher tax (typically property tax) burden on residents.

Still, despite their benefits, impact fees are not without their problems. The most common complaint is that impact fees create a drag on the local economy. Developers object to impact fees on the ground that they have adverse effects on the housing market. Although impact fees are levied on developers, most developers acknowledge that they pass the costs along to the homebuyer in the form of higher home prices. As a result, some fear that the burden of impact fees will be on low- and moderate-income homebuyers and will perhaps even price those buyers out of the market. Furthermore, impact fees are regressive in that they are applied uniformly as a fee rather than according to the property's value.

However, impact fees are a practical means of addressing fiscal shortfalls. Although public facilities have historically been financed from property taxes, studies have shown that property taxes typically do not cover the costs of the new infrastructure needed as the result of new development. It is also unlikely that a uniform tax rate with varying property values would cover the costs without an increase in property tax rates for all residents. Finally, increasing property taxes for new development is often politically untenable. So when cities are faced with the option of raising property taxes on all development, deferring maintenance, diverting general funds from other areas of governance, accepting congestion of facilities or charging impact fees, cities will, understandably, continue to choose impact fees.

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