Impact Fees

Though the City has used impact fees for years, many public officials, developers, and the general populace still do not understand the basis for impact fees. There is a need for a practical discussion of the philosophical reasons used to develop impact fee policies and why the city uses them.

Philosophical discussions about the need for impact fees and related policy issues effect many city decisions. However, the basic rationale for charging impact fees is that new development should pay the costs associated with growth. Conversely, the existing residents should only bear the costs of improving existing services.

New development requires the expansion of existing facilities and because they are solely responsible for the expansion, the new development should pay for the cost of providing the expanded facilities. The cost of projects needed to support growth is financed with impact fees based on some measurement of a development's impact on future needs. Through impact fees, new development pays the full marginal cost of providing facilities necessary to accommodate growth. Impact fees, then, offset many of the subsidies of new development that occur in rate or tax financing. Impact fees are not intended to replace rates which are used for operational expenses and to pay for capital improvements to correct an existing deficiency or shortfall.

The impact fees become a one-time charge applied to new development. Impact fees are related to land-use regulation and are designed to assure that communities maintain adequate levels of public facilities in the face of growth. The resulting revenue generated for the construction or expansion of new facilities is coincidental to a city’s land-use regulatory (i.e. police power) purpose. Were it not for growth many communities would have adequate public facilities and often if growth is at a manageable pace adequate public facilities can be provided concurrent with the impacts of growth. To assure adequate public facilities, impact fees are assessed and dedicated principally for the provision of additional water and sewer systems, schools, libraries, parks and recreation facilities, and other infrastructure made necessary by the presence of new residents in the area. The funds collected cannot be used for operation and maintenance, repair, alteration, or replacement of capital facilities.

Impact fees have developed substantially throughout the United States and have been used in a wide variety of forms covering different types of infrastructure in varying amounts around the country. These changes have taken place through legislation, regulations and court cases. While the process can be rather complex, the underlying fee principles are now better defined and more straightforward than in the past. Indeed, it may be one reason impact fees have grown substantially in many communities.

The use of impact fees to finance public facilities necessary to accommodate new growth is a concept that has gained acceptance in recent years. There has been substantial development of theory, practical models, and legislation for determining growth-related costs and calculating impact fees for new construction.

Although impact fees do not alter total service or infrastructure costs, they do affect the distribution of these costs. Each community will need to make a policy decision about whether the cost of new infrastructure is charged directly to the new residents or shared, via higher rates or taxes, among all current residents. This is a sensitive issue because previous residents can refuse to raise the taxes needed for new facilities serving new people, or if the costs are charged to new users, previous residents can enjoy the benefits from the construction of new public facilities without paying for them.

By adopting impact fees, councils are attempting to ease the burden of current residents from the burden of paying for the provision of incremental infrastructure by shifting future infrastructure costs onto new residents. Therefore, new residents are essentially buying their way into the community.

The planning involved in Impact fees can be an instrument to guide development efficiently and accomplish the goals of the comprehensive plan. When impact fees are reasonably implemented, they allow local governments to finance construction improvements on a schedule that ensures that the improvements are in place to serve new development. Thus, an impact fee is an effective tool in guaranteeing adequate infrastructure to accommodate and facilitate growth in areas where there is a lack of public facilities, also eliminating substantial infrastructure costs in areas where there is little current development by avoiding a leapfrog urban sprawl pattern.

Adopting an impact fee scheme may carry additional costs to the city itself. First, all things being equal, businesses may choose to locate in a community without impact fees instead of one that has impact fees, thus retarding urban growth. Second, impact fees require local governments to engage in more professional and sophisticated capital facilities planning, requiring additional administrative staff with the necessary skills.

Thus, a disadvantage of the impact fee scheme is that it is more complicated and expensive to implement. A fee system may also reduce the price of undeveloped land because impact fees act as a deterrent to develop open land.