In The Vanishing Automobile and Other Urban Myths, I suggested that impact fees might sometimes be a good way for cities to pay for the costs of growth. I have since changed my mind. Impact fees are bad under any circumstances.
I was persuaded of this when I reviewed housing affordability in urban areas across the country. I realized that the cost of existing homes closely tracks the cost of new homes. So when government regulations or fees increase the cost of new homes, the price of existing homes also rises.
Will the taxes paid on this new home pay for the services its residents consume?
Impact fees may add to municipal revenues. But they also create windfall profits for sellers of existing homes. Since existing homeowners tend to be wealthier than first-time homebuyers, these windfall profits turn out to steal from the poor and give to the rich.
Studies show that the demand for new housing is inelastic, an economic term meaning that a small change in the supply leads to a large change in the price. One way of looking at this is that people need a place to live and will pay what it takes to get one.
Let’s say a city imposes a $25,000 impact fee on the cost of new homes. The price of housing may not immediately grow by $25,000. Instead, builders may slow the rate of construction a bit because they fear some homes won’t sell at a $25,000 higher price. This contraction in supply leads to a large increase in price. Pretty soon, home buyers are paying pretty close to $25,000 more for all homes in the market.
Of course, if people have an alternative, such as buying homes in an adjacent city that hasn’t imposed an impact fee, they may do so. But as one city in a region imposes impact fees, others see the revenue possibilities and soon follow suit. Pretty soon all housing in the region is less affordable.
But why did the cure of erectile cialis sale online dysfunction come so late? Many attribute the late remedy development to the male organ. Those who take viagra no prescription can continue this medicine, if they have budget issues. You can order get viagra in canada the medication discretely internet shooping to overcome sexual dysfunction problems with ease. 2. The more cigarettes you smoke the more likely levitra viagra online deeprootsmag.org you are going to suffer from ED.
Impact fees are often based on claims that growth, particularly low-density development, doesn’t pay for itself. But the studies that reach this conclusion are faulty. They typically find that the cost of providing schools and other services to a new residential area is greater than the taxes those residents can be expected to pay.
If this same method were applied to existing neighborhoods, however, it would produce the same result. What they miss is that retail, commercial, and industrial areas also pay taxes, and those taxes are generally much greater than the services they consume. Why? Because all of them pay taxes for schools, yet only residential areas “consume” school services.
Even if it were true in some area that growth does not pay for itself, impact fees are the wrong solution because there is no guarantee that the buyers of new homes are newcomers or that newcomers will buy new homes. Thus, the impact fees fail to target growth.
The other problem with impact fees is that there is no guarantee that the collected fees will actually be used to provide transportation facilities for the people paying the fees. A true user fee gives both the users and the producers signals about where new facilities are needed and how much they cost. Impact fees do not provide such signals.
For example, many cities use impact fees for transportation. But there is no assurance that the people who use the facilities built with those fees will be the ones who paid the fees.
User fees — fees for actually using a good or service — are the best way to pay for things. This means water fees for water actually consumed, road tolls for actual driving on the roads, and so forth. Impact fees are not really a fee; they are a tax because the people paying the fee are not necessarily getting something in return.
If true user fees cannot be used to pay for something, the next-best choice is a property tax or some other tax that pays for things over time. Say a city needs to install new sewage facilities to handle new residences recently built in the city. There is no particular reason why those facilities will cost any more than the facilities serving existing residences, and the same sorts of taxes that existing residents pay can be used to pay for the new facilities. Paying for them over time will not inflate the cost of the new homes and thus will have no impact on the general affordability of the region.
In general, growth does pay for itself. In particular, impact fees do far more harm to a community or region than good. Cities should replace such fees with other forms of revenue or, better yet, cut the fat out of their budgets so that they can live on existing revenues.
Even if it were true in some area that growth does not pay for itself, impact fees are the wrong solution because there is no guarantee that the buyers of new homes are newcomers or that newcomers will buy new homes. Thus, the impact fees fail to target growth.
[…]
In general, growth does pay for itself. In particular, impact fees do far more harm to a community or region than good. Cities should replace such fees with other forms of revenue or, better yet, cut the fat out of their budgets so that they can live on existing revenues.
This passage indicates, Randal, that you don’t do planning on the ground, nor do you even understand how things actually get done on the ground. Your solutions are generally practical non-starters, and this one is a doozy.
1. The substantial body of Cost Of Community Services literature is very, very clear that residential growth does not pay for itself. 2. And businesses don’t come unless there are houses there already. 3. Impact fees also pay for schools which cannot be paid by user fees. 4. Lastly, If a non-newcomer buys a new house, there is a resultant vacancy that may be filled by the newcomer. It’s not that hard & maybe you could ask johng for help in understanding how it works. Now,
Cities must pay for capital facilities (infrastructure), unless you would have the development community float the paper and take the risk to provide capital facilities (this would have the effect of stopping growth in that community and promoting it elsewhere). Governments raise funds and take the risk to provide future capital facilities.
That’s the reality: people want amenities at the time they move to a place – it’s part of Tiebout sorting and locational choice; they’re going to choose to move to a place with a park and a school, not a place that will have a park after their user fees collected from using a different park farther away get it built some time later.
So where does the money come from to invest in advance? From users paying for something already built? Really? Cities forecast growth to make investment in anticipated capital facilities. Anticipated impact fees are part of the ability to repay the investments. How would you forecast user fees for a park as surety for repayment? No bank on the planet will loan you cash with that kind of surety.
Again, charging user fees means that only folks using an already emplaced service pay for that service. User fees do not provision infrastructure in the time between the implementation and the build time. There will be a gap in provisioning capital facilities and the gap will result in people Tiebout sorting to a location that has the amenities they seek.
Impact fees are de facto user fees.
DS
Oh, and the caption to the accompanying foto:
Will the taxes paid on this new home pay for the services its residents consume?
Likely no.
This is why the rush to build auto malls on the I-80 corridor from San Francisco to Lake Tahoe happened – they needed the sales tax revenue to balance the books.
DS
The problems with these fees are compounded by the fact that people build them into their mortgages, they have to borrow money, go in debt to finance the up front costs. This is somewhat like our federal government borrowing to finance current expenditures.
So now we are asking a younger generation to pay “buy in” costs in order to join our society. Rather than cut spending or raise revenues through current taxes we look to those with little political capital to finance our government. They not only have to “buy in” but we are going to saddle them with debt in the trillions of dollars. Irresponsible is not a stong enough term.
The essential problem is lack of political will to only provide services people are willing to pay for. Instead public sector staffers are providing “creative” ways to collect money in order to keep the expenditures flowing without raising general taxes. Best of both worlds for the people already owning a house. Burden our children with higher taxes and get a higher price for the home you already own.
This is a very narrow tax impacting a small percentage of the people. We know, of course, that a broad tax is much more fair but we also know the broad taxes are subject to voter approval or referral to a vote. This is more likely to lead to rejection of higher taxes. New home buyers don’t normally get to vote on impact fees so adoption is very easy.
Wise use of current revenues is the solution to many of the growth financing issues facing cities in Oregon. I wouldn’t count on any wisdom from our elected leaders but would instead expect further creative fiancing on the backs of generations to follow. These fees are basically immoral in nature.
I don’t see how these fees are ‘immoral’. You can choose not to pay them by not buying a new house. And I argue that it is more immoral to have a school district figure out how to tax you more to pay for schools for all the newcomers – a public good.
And voters certainly can vote on impact fees – they are subject to public review and the public can choose to reject their increase.
But since the public doesn’t want to pay higher taxes to fill potholes ( a public good), one alternative is to charge impact fees for, um, the impact the new house has on existing infrastructure.
I challenge readers to figure out how to fund infrastructure in the gap period (10-15 years) between when user fees kick in and there is enough money in the kitty to start building stuff. Share your ideas, write cogent op-ed pieces, lobby your elected official with your new, fresh ideas.
Then go into your local Council meeting, and speak up. Let us know how you propose to pay for stuff people want.
DS
Randall has explained how raising impact fees increases housing prices. Lowering property taxes also increases housing prices. Proposition 13 in California reduced the costs of house ownership making houses a better investment for landlords and homeowners, who bid up prices.
Perhaps we should have “user fees” pay for schools; that is, only those who benefit from public schools should have to pay for them. This includes employers whose employees learned to read, write, use computers in public schools, everyone who has attended a public school, and those who are served by public employees and elected officials who attended public schools. Did I miss anyone other than migrant workers?
Dan,
The moral issue is tricking the public into taxing others for what we are not willing to pay for ourselves. Hiding the tax or taxing those who can’t vote by virtue of not living here yet or being old enough to vote is immoral in my opinion. Like you say the schools are a public good that should be paid for by all not just the newcomers.
As for voters rejecting the fees keep in mind they generally don’t have to pay. It’s the newcomers who can’t yet vote who do.
Filling potholes misleads because impact fess will not be used for that purpose. Impact fees must be used for infrastructure improvements related to capacity increases. You can’t use SDC’s for maintenance. We now see cities collecting “user fees” since most have bumped up against measure 5 limitations. This is an end around move to subvert the will of the voters when they voted to limit government spending through measure 5.
Your challenge is understood but I disagree with what the challenge should be. I would respectfully argue it is to limit the spending on non-traditional municipal services in order to provide those traditional ones like streets and sewers. I see spending as the problem not revenue generation.
It’s a question of values and priorities that reasonable people can disagree upon.
I’m not convinced that these fees are paid by new home buyers. When developers bid on a property they usually come to the value they can pay by backing into it. By that I mean they calculate what the maximum price at which the homes might sell for, less their required profit margin, less the cost of building, financing, insurance, impact fees, permit fees, etc. What is left over is what they offer for the land. A more efficent builder usually wins the dirt in this scenario.
If impact fees are raised that simply results in less available to the land owner who is often a retired person that is a pillar of the community. If builders could increase costs on their houses and buyers would willingly pay those increased prices, they would have raised those prices already.
So, in the short run develpers may pay the tax because they have land that they already own and in the longer run the value of vacant land will fall to offset the higher cost of the fees.
Johngalt,
The amount landsellers are willing to take for their land is no more flexible than the amount anyone else is willing to take. When impact fees are imposed or increased, the first response is to reduce the supply of housing. This increases the price, which brings some of the builders back into the market.
This issue is addressed, in a slightly different context, starting on page 15 of this paper.
While that was interesting Randall, I’m not sure it fully addressed what I see on the ground. Many development parcels sell in a sealed bid auction with the high bidder obtaining the right to develop. If costs are known like an SDC would be, it would be passed directly to the landowner assuming normal profits would otherwise be made. I just don’t see how a builder can just pass it on to the buyer or, like the paper said, agree to build for less than they could earn elsewhere.
You do have a point that the fewer landowners might sell or that land that could be used for development pre-tax might be better used in a different way post-tax thereby reducing supply and thus increasing prices and inefficiency.
What happens is: say you have a 10ac greenfield parcel in city limits where water/sewer is available now. This sets the raw land price, nothing else except zoning district.
You pay your price for the raw land knowing you have to subtract 12-20 % for ROW, ~2-5% for stormwater, ~x% park space (or fee-in-lieu), any other % for offsite traffic mitigation (traffic light, channelization, turn lane’turn pocket). The remaining acres (say, 6.5 here) gives you how many houses you can build according to the zoning which says min lot size.
You know this going in, so the # of houses you can build is backed into and you know that, say, the zoning says your minimum lot size is 8000 sf giving you ~net 4/ac * 6.5 = 26 homes. Your profit on a house for this size lot is x. You know that the project will take 2-3 years from start to finish, less if you have the capital, more if you have to carry paper and deal with the bank, and that you must build 22 homes to break even after all costs.
So, pack impact fees on top of this (already known) and where does this screw up anything? It doesn’t affect land price, it affects final house price. It is better for the developer to be able to parcel down smaller; in this example, say to 5000 sf because that gives you ~7-8 nethouses/ac * 6 (more infra) = 42 houses and here maybe 34-35 houses to break even. This is way better for you as you likely will make more money depending on your price point. It is always – always, always better for a developer to parcel down to the smallest lot size possible. That is how it works on the ground and why it is hard to provision affordable housing, because most costs are fixed and it is hard to cut corners enough in the material/time/labor cost to make it much less. It is way easier to slap granite countertops and a few nice fixtures and window upgrades and there your margin is higher with little more cost. This is how most developers work – it is far easier to make more money by slapping in the granit countertop than it is to cut costs for affordable housing.
So, the impact fee comes into play only because 42 houses = 9.1 trips/day = ~380 trips/day vs 26 huses = ~235 trips/day. 42 houses is a far greater impact on roads and water and sewer, and it starts happening right away. The developer doesn’t care about roads crumbing faster from 42 houses or slower from 26 houses, they only care about controlling material costs and project slowdowns to get the last loan payment made to have the last 4 or 7 houses be pure profit.
I don’t know how you charge a user fee to flush a toilet over what you do now, unless you raise rates which will reduce usage and slow your capital collection thus slowing provisioning of infra.
But impact fees are never going to go away unless someone can figure out how to pay for stuff on the ground.
Non-starter.
DS
Well Dan, I know how developers work because acutally buy land and build houses so I know first hand how it is valued. I also know that most planners I deal with think they understand the business but few if any do.
Let me tell you, land prices are not just “set”, they are backed into. Again, if I could charge $425,000 for a house that is now worth $400,000 why wouldn’t I already be doing it? How does the addition of a new fee make a buyer suddenly able to qualify for a larger mortgage or have a larger amount abvailable for a down payment?
By the way Dan, I before minimum density laws here in the Portland area I regularly built 1/2 acre lots on land zoned for 10,000 lots and made more money so it does not ALWAYS pay to parcelize to the smallest lot. I just completed a condo project on land where I could have built 300+ units in 6 story buildings, instead I made a much better return with lower risk by building 100 units in 3-story buildings (there was no minimum density requirements on this land).
Thank you johng. I note you haven’t come up with a scheme on how to pay for infra absent impact fees, which is the point in this thread that user fees will stop growth until there’s enough money to start building (years). Plus, I’m sure my old Real Estate profs would be disappointed to hear your statement about planners, but nonetheless,
How does the addition of a new fee make a buyer suddenly able to qualify for a larger mortgage or have a larger amount abvailable for a down payment?
The addition of a new fee does not make anyone able to better qualify; in fact, I specifically said it impacts final house price.
Impact fees pay for things that must be paid for and are not free. You the developer certainly aren’t going to pay for them out of your pocket, so who will – someone living across town who doesn’t want the additional traffic from the new homes? Sure they will.
For example, new schools required by the new home. User fees will not pay for new schools (maybe they should – this certainly will reduce the birth rate). Impact fees pay for new sewer and water pipes and WWTPs. User fees will not pay to install new pipes needed to supply new homes until sufficient time has passed to build up enough capital in a capital account; during the years this happens under this scheme nothing will get built.
You, of course, know this, being a developer and all; you also know that if you were required to pay for the pipes you’d tack it on to the cost of the home. As you do today if you go thru to build houses (don’t flip after platting) and are required to pave the road and put up street lights, install turn pockets on the arterial leading to your development to mitigate the impact of the new trips you are creating. As you tack on to the final price the cute pansies and violets you install under the subdivision monument sign, the street trees you are required to put in, the front yard landscaping to make the house sell faster (if its not spec.), the people you pay to cut the grass in the common area until you final transfer, yada.
My point is infrastructure is not free. It has to get paid for, and impact fees do it so taxpayers elsewhere don’t. It’s not a hard concept to grasp, really. I’m not sure why there’s mendacization on this simple subject that’s easy to grasp, unless someone wants to hand-wave away from something else. Maybe we can tack on the cost of the new infrastructure required to the new home and call it something else, like a growth fee.
I just completed a condo project on land where I could have built 300+ units in 6 story buildings, instead I made a much better return with lower risk by building 100 units in 3-story buildings (there was no minimum density requirements on this land).
This is completely consistent with my point. Thank you for helping.
Your FARs were still way higher than SFR, and you chose to build densely** rather than build SFR because you packed as many dwelling units per unit area as you were comfortable carrying the paper and the risk for. That is: you built up. And like I said folks slap on some granite countertops and get a higher ROI to get the amount they want to make. Your small cost of upgrades made the units far more valuable for a little more loan and risk on your part.
DS
**[gosh, I wonder if there’s a market for dense units…I wonder…I wonnnnderrrr…]
You still don’t get it Dan.
“The addition of a new fee does not make anyone able to better qualify; in fact, I specifically said it impacts final house price.”
Right, if I could simply increase the price I would do it without the fee. I cannot and capital is mobile so the only place for it to come is the LAND SELLER. If the cost of pavement or sewer pipes goes up that too comes from the LAND SELLER. If I could increase my return with granite counters I would already have that in my proforma when I calculate how much is left over to bid on the land.
Who should pay for the new infrastructure? We all should. These new houses add a tremendous amount to the general fund (directly from property taxes, income and sales taxes, etc and indirectly from taxes charged for the commercial economic activity this growth generates). Expanding the systems to accomodate them is a good investment. In the “good old days” the city would put in the streets, sidewalks & utilities on their dime to get the “tax base”.
Did you cherry pick to make your point about developers always maximizing profit by maximizing density? The point I was making was that your theory is not always true that developers would choose the smallest lots. If that were true the planners would not have mandated minimum densities. What about the 1/2 acre lots in the 10,000 sf zones that I did before the minimum density laws?
You still don’t get it Dan.
Sure I do. You’re coming at it from your point of view, me from Randal’s topic. The point of Randal’s post is even linked for you: housing affordability. The point you make in:
I cannot and capital is mobile so the only place for it to come is the LAND SELLER. If the cost of pavement or sewer pipes goes up that too comes from the LAND SELLER. If I could increase my return with granite counters I would already have that in my proforma when I calculate how much is left over to bid on the land.
is too narrow: you pass all your costs to the cost of the house.
If you have a price point for the finished unit and a margin, and the platted land price is too high for you to hit those, you don’t buy. You already know your impact fee is part of the price point, as are app fees, T&M, interest on your paper.
Who should pay for the new infrastructure? We all should. .
The reason for impact fees is homeowners across the country quit wanting to pay for infrastructure for new homes that didn’t benefit them. The term is ‘growth pays for growth’.
Returning to your scheme will likely result in homebuilding coming to a screeching halt.
These new houses add a tremendous amount to the general fund (directly from property taxes, income and sales taxes, etc and indirectly from taxes charged for the commercial economic activity this growth generates)
Residential units don’t pay for themselves – they cost the general fund money. I’ve discussed this on this blog already.
The point I was making was that your theory is not always true that developers would choose the smallest lots.
You’re right: I should have said ‘if they want to or can carry the paper’. Apologies.
DS
You obviously don’t seem to want to get it so I’ll stop explaining.