Impact Fees—Past, Present, and Future

This chapter serves as a background on impact fees and how they have evolved over time. It also includes data on how impact fees are being assessed today, with tables summarizing national data and several useful local examples illustrating specific impact fee structures. It concludes by introducing the concept of equity as applied to impact fees and their effect on affordable housing.

The Need for Infrastructure Financing Tools

Financing basic community infrastructure in the United States has become more complex and more expensive with each passing year. It has become more complex because we are continually expanding our urbanized areas and thereby requiring increased infrastructure. Table 1.1 shows some basic trends for the United States. The urbanization of the nation's population has continued, and with continued urbanization comes increasing numbers of people and households looking to government for services, including the provision of infrastructure. The population continues its shift to metropolitan areas. However, this shift has been at a lower rate than in the past. Both the number and the populations of all urban areas have continued to grow, most notably in medium-sized cities. In both the medium-sized and large cities, the population per city declined, simply indicating that the cities added to that size grouping would be at the lower end of the size range, thus reducing the average size.

But noting increased numbers of people in cities alone understates the demand. As incomes have increased, the public's expectations of and demand for public facilities have also grown. Schools are no longer aggregations of classrooms but have become multimedia learning and social-cultural centers. The transition has greatly increased the cost of providing educational facilities. The same is true for park and recreational facilities. Gone are the days when a ball field was simply an otherwise vacant area where ball was played. Now they are stadiums with all the accoutrements, including red dirt. A fire department no longer simply puts out fires; today it offers advanced life support. These evolutions are responses to public demands. Few would doubt that the quality of modern public services is greatly improved. And few would doubt that the cost of these services has greatly increased.

The federal government has long since reached its peak as a growth source of revenue to state and local governments. Since 1972, the federal portion of state and local revenues has remained constant at about 20 percent. This has left state and local governments to rely on their own revenue-generating abilities to meet the demands of the public. Some suggest that the federal government is responsible for many of the increased costs being borne by local governments through the use of unfunded and partially funded mandates.

As urbanization and public demands grew, inflation became an important political and economic fact of life. For most of U.S. history, inflation had not been an issue. During the 1970s and 1980s, however, this was not the case. One pernicious aspect of inflation is that it significantly weakens the revenue from fixed-base taxes, such as the motor fuel taxes. Inflation increases the cost that fixed-base revenue sources are to cover without increasing the means to pay those costs. Inflation increases the cost of road construction and maintenance but does nothing to the proceeds derived from a levy of 6 or 8 cents per gallon. In the face of such a problem, the logical thing to do is to raise the fixed-base tax. Property taxes, while not fixed base, require action to be increased. The action required is an increase in the assessed or taxable value of the property.

Figure 1.1 shows annual rates of inflation from 1970 to 2004. During that time period, the average rate was 4.95 percent per year, about twice the long-term rate of inflation. Annual inflation during 1980 was 13.5 percent, and the year-over-year rate peaked during 1980 at more than 17 percent. Such rates of price growth meant that the purchasing power of fixed-base taxes, such as the motor fuels tax, declined by 13.5 percent during 1980. One commodity most responsive to inflation is real estate, including development property. In fact, real property inflation tends to proceed faster than general inflation. General inflation increased public facility operating and capital costs, but it also increased the prices of both new and existing homes, thereby increasing the property taxes on those properties. It should not be surprising that California's Proposition 13 was enacted in 1978, during a period of unprecedented inflation. Proposition 13 rolled back property taxable values to 1975 and capped their rate of increase.

Massachusetts soon followed in 1980 with Proposition 2½, which took its name from the limit on property taxes being no more than 2.5 percent of taxable value. Since the referendum enactment of these two limits, all states have taken some action on limiting property taxes. Thus, property taxes tend to act like fixed-base taxes because of the limitations imposed by legislation or constitutional amendment.

Local governments were faced with conflicting demands:

• Increase the supply of facilities, especially infrastructure, to larger populations

• Increase the quality of public facilities, also to larger populations

• Avoid tax increases in meeting these demands

As these events unfolded, the philosophy of taxation moved more toward the use of the "Benefit Principle" and away from the "Ability to Pay Principle." This shift, combined with continuing urbanization and inflation eroding the tax base, set the stage for "alternative" sources of revenues.

As a result of new federal environmental mandates, local jurisdictions were also being directed to make massive investments in water pollution control facilities. These investments originally were funded up to 85 percent by federal grants. They are now funded by federal loans amounting to 45 percent. The highway system that was to be primarily funded by federal sources has fallen into...