Impact Fees Don't Mean Development Is Paying for Itself


Who pays the costs imposed by new suburban development? A news story we recently shared on social media describes an August 15th decision by the Minnesota Supreme Court which strikes down the use of development impact fees in that state, ruling that they do not fall within cities' taxing or planning authority.

None of us here at Strong Towns are attorneys, so you won't get any opinion from us here on the legal question. But the question of whether impact fees are good policy gets right at the misconceptions about development that drive America's Growth Ponzi Scheme.

Impact fees are fairly common in suburban jurisdictions, not just in Minnesota but in many states, as a way of assessing real-estate developers for the direct public infrastructure costs incurred by new development, so that those costs are not borne by pre-existing residents of the city. For example, if the building of a new subdivision requires that streets outside the subdivision itself be expanded to accommodate the resulting traffic—as the St. Paul suburb of Woodbury argued in defending its impact fee program—such a fee would be a way of ensuring that the developer will pay for that expansion. Impact fees may also go toward capital costs incurred by schools, libraries, parks, police and fire—any local government departments that incur major up-front capital expenses because of an increase in local population.

About half of U.S. states have laws expressly allowing cities to levy such fees, but Minnesota does not—and now, the legal status of existing impact fees in Minnesota appears to be in jeopardy. This feels like it ought to be consequential news for those of us concerned with the cost and return-on-investment of development. But in fact, impact fees are largely a distraction from a more fundamental issue.

A distraction? How?

The short answer: because impact fees don't do what they're purported to do. They don't actually make development pay its own way.

The standard justification for impact fees—that they exist to protect existing taxpayers from rate hikes due to the costs imposed by new development—is just untrue. And the reason why is something regular Strong Towns readers may well have recognized by now: at best, impact fees are merely a one-time charge in exchange for taking on a permanent obligation.

The truth is that most suburban development does not generate enough revenue to pay for its own long-term maintenance costs. Strong Towns cited examples of this in The Growth Ponzi Scheme, Part 2. We teamed up with geoanalytics firm Urban3 to demonstrate it again in Lafayette, LA, where residents would have to accept somewhere between a 220% and a 533% tax hike just to break even on the costs of maintaining existing infrastructure.

This chart used in our Growth Ponzi Scheme series illustrates what the cash flow to a local government from auto-oriented development typically looks like over time.

The fundamental problem is the automobile-oriented development pattern: with vast amounts of land devoted to storing and moving cars, this form requires a lot of infrastructure for a very low yield of productive economic activity (which can be measured as taxable value per acre).

The issue here is not the first-generation cost of building out this infrastructure. The issue is the second life cycle and beyond. Every foot of road, water pipe, or sewer main will eventually have to be replaced. By approving the development and associated infrastructure expansions, a city is making a promise to its current and future residents to maintain that infrastructure indefinitely.

The real question our cities should be looking at when they make decisions about what development to encourage or allow is this: what will the second, and third, and fourth, life cycle look like? 

 A wide suburban intersection, big enough to accommodate the traffic generated by surrounding auto-oriented development.

A wide suburban intersection, big enough to accommodate the traffic generated by surrounding auto-oriented development.

This doesn't itself mean impact fees for up-front costs are undesirable. There are certainly arguments in favor of them. It seems inarguable that new development in a car-dominated place like Woodbury, MN is going to add a bunch of vehicle trips to existing roads outside the development, and that may require costly capacity expansions. Similarly, it will impose burdens on the school system, parks, fire and police, et cetera that require new capital expenses—for example, an overcrowded school might mean that a new school must be built. Accumulated impact fees from years of development are a pot of money a city can use to do so.

But these fees, by reducing the up-front fiscal impact of growth, might actually be a dangerous temptation. Because they might just make it easier for cities to justify approving unproductive, fundamentally insolvent new development. If the developer of that subdivision is not only paying to build the internal streets, but chipping in money for external infrastructure upgrades, it might give the city the feeling that they're getting something for free. They're not.

The fiscal impact of approving productive growth is like letting your kid start a vegetable garden. They spend the allowance they've saved up in their piggy bank to buy shovels, potting soil, a watering can, and seeds. You, the parent, agree to take on the modest ongoing costs—fertilizer, water, occasional replacement supplies—and in exchange, the whole family gets delicious veggies on a regular basis.

The fiscal impact of approving unproductive growth is like letting your kid get a cell phone. They spend the allowance they've saved up in their piggy bank to buy the phone itself. You, the parent, agree to take on the cost of the data plan—month after month after year after year. (If you're anything like most parents of 30-somethings I know, you're still paying it.)

The real, operative issue is not whether the kid or the parent pays the one-time, up-front costs. It's about the recurring, long-term costs, and whether they're matched by long-term benefits.

Cities in Minnesota and elsewhere would be better served by focusing on getting their fiscal house in order, the way the data wonks running Fate, Texas have tried to do: by rigorously evaluating whether new development is going to be a net positive or a net negative for the public coffers. This ultimately depends on a comparison of the life-cycle costs (not just the initial cost) per acre to service a development versus the tax value per acre that development's going to bring in.

It is possible to grow in a way that is a win-win for new residents, developers, and existing residents. In this virtuous cycle, services improve, and amenities improve, because that growth is generating real wealth and making the city a better place. Such a city is like a great party: one in which each new guest that shows up brings something to share and enhances the experience for everyone.

On the other hand, if a place is experiencing intense debate about making development "pay its own way," it means the dominant perception is that new development is a burden to existing taxpayers rather than a boon to them. Intractable local resistance to growth is a pretty good sign that that place has thrown itself a bad party. If you're approving the wrong sorts of development—that which makes you poorer instead of richer—impact fees are a distraction from your real problem.

(Top image source: pxhere.com. Creative Commons license.)