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Impact fees are one-time charges levied by local governments on developers or builders to mitigate their project’s proportionate share of impact on such community facilities as parks, libraries, schools, roads, water, sewer, drainage, and even cemeteries, subject to state impact fee restrictions where applicable. Impact fees bridge the financing gap between what local communities can afford from traditional sources of revenue and the money needed to pay for facilities needed for growth. The reality is that without impact fees, new development would be stifled, leading to underproduction and higher prices.
Various forms of impact fees have been used in the United States for more than a century. They are usually a response to rapid suburban residential growth and its need for costly new infrastructure. They are also emblematic of a fundamental shift in American society away from broad based support for community infrastructure to having new development pay those costs.
Impact fees replace ad hoc exactions (sometimes called “extortions in the public interest”). Let me offer an example of what used to be the case with an experience I had in the 1970s. My client secured approval for a 50-lot subdivision where he intended to build entry-level homes, at the time selling for around $50,000. The morning after approval, the city raised its sewer fee from $250 to $2,500 per home, erasing his entry-level home profit margin. The city claimed they needed the higher sewer fees to support its budget. This was an ad hoc exaction that functioned more like an excise tax than a fee. My client responded the only way he felt was feasible; he built homes for the middle market instead. Instances like these, in no way rare, are why I’ve spent my professional and academic careers advocating for what are known as proportionate share impact fees and development mitigation.
Proportionate share impact fees hinge on four critical elements. First, they must be tied to the local community plan and its implementation system. As such, the fees are principally a regulatory device and coincidentally a revenue device. Second, the community must establish a level of service standard, for example, providing a specific number of acres of parks per 1,000 residents. Third, impact fees need to be calculated based on and expended in service areas to ensure a reasonable relationship between the fees paid and benefits received. Fourth, and foremost, impact fees must be proportionate to impact.
The principle of proportionate share means that new development is assessed impact fees proportionate to its impact on facilities. In transportation impact fees, for instance, a one million square foot office building pays 100 times more in impact fees than a 10,000 square foot office building because, according to data available to impact fee analysts, it generates 100 times more road trips. This is proportionate. Unfortunately, some analysts apply the trip generation rate for single-detached homes to all residential development, including studio apartments within walking distance to transit. This violates proportionate share principles.
Another way that local governments violate these principles is by applying the same impact fee to all residential units regardless of type. In one county, for example, lower-than-proportionate impact fees are levied on mansions while higher-than-proportionate impact fees are levied on studio units and other smaller homes. To manage the legality of this, the local legal counsel defined proportionate share to mean the average of all residential units regardless of proportional differences between them. Since those impact fees were adopted, new multi-family home supply in that county has largely vanished and housing affordability is a serious issue.
Service areas are needed to account for difference between geographic areas in order to calculate impact fees that reflect proportionate share differences. Efficient economic thinking would dictate that high-cost—typically high-income—areas pay higher impact fees than low-cost—typically low-income—ones. Unfortunately, some local governments perceive more than one service area as extra work for analysts and more paperwork for officials. Averaging impact fees over low- and high-cost areas, however, results in low-cost areas subsidizing high-cost areas. In one community I studied, for example, the low-cost area paid impact fees about 2.5 times higher than its proportionate share, while the high-cost area paid about half its proportionate share. This is a clear violation of the principle of proportionate share and undermines housing production in lower-cost areas.
These are only a small sample of abuses and deviations from the principle of proportionate share I have encountered over my career. Fortunately, action can be taken to address these issues. In no way being exhaustive, I offer these six recommendations.
- There is a direct connection between proportionate share impact fees and the code of ethics provisions that address social justice among the planning, legal, and related professions. This connection needs to made clear, something both my colleagues and I are advocating.
- Better demographic and housing data are needed at the local level. Too many impact fee analysts do not know how to access and manipulate online data from the census, the US Department of Housing and Urban Development, state agencies, nonprofit associations, and others to calculate proportionate share impact fees. Residential development interests should pool their resources to generate local data that analysts can use free of charge when they calculate impact fees. Doing so has important legal (such as constructive notice), professional (code of ethics), and political (housing affordability) implications. This should include concerted public education and information efforts.
- Currently, only impact fees from residential development pay for such facilities as parks and recreation, libraries, schools, and related facilities. However, it is untrue that only residential land uses impact those facilities. Analysis is needed to fairly apportion a share of the costs of these facilities to nonresidential land uses, thereby reducing residential impact fees.
- More analysis is needed that refines the impact of special types of housing on facilities. For instance, very few impact fee schedules recognize HOPA (Housing for Older Persons Act) compliant age-restricted housing as a special housing type, even though these homes average 40% fewer persons per unit than single-detached homes. Age-restricted homes are thus over-charged as a class in most impact fee schedules.
- Better metrics for utility-based impact fees are sorely needed. For example, homes that average fewer than 500 square feet typically house about 1.3 persons per unit, while homes between 500 and 999 square feet typically house about 1.6 persons per unit. Yet, they typically pay the same water and wastewater impact fees—also called connection fees—as homes of more than 4,000 square feet, regardless of the fact that the latter averages twice as many persons per unit. Those impact fees are based on the standard residential water meter connection, but it is clear that one size does not fit all when it comes to proportionate share impact. We need analysis that scales water, wastewater, and other forms of utility impact fees to the size of the home and parcel, not the size of the meter.
- A free, publicly accessible repository of residential impact fee innovations is needed, sharing the policies that scores of communities have created using proportionate share analysis to increase housing supply, advance housing affordability, and improve social equity.
Impact fees have a profound effect on the production of homes because they help provide the very facilities needed to make development happen. But impact fees that are not consistent with proportionate share principles will distort housing markets and contribute to Housing Underproduction. In contrast, truly proportionate share impact fees will help advance housing affordability in ways that promote social equity as well as generate more economic and fiscal benefits. Implementing the recommendations above and supporting related efforts are needed to realize the bold vision in Up for Growth’s A Better Foundation.
About the author
Arthur C. Nelson is Professor Emeritus of Urban Planning and Real Estate Development, University of Arizona, and Presidential Professor Emeritus of City & Metropolitan Planning, University of Utah. He is a fellow of the American Institute of Certified Planners. Nelson has conducted pioneering research into impact fees and is the author of leading publications advancing the role of impact fees in facilitating housing production, economic development, and social equity—when done right. Nelson’s latest book (with others) is Proportionate Share Impact Fees and Development Mitigation (Routledge 2023).