The Effects of Impact Fees on Single-Family Home Construction: a Segmented

The Effects of Impact Fees on Single-Family Home Construction

Detailed Abstract

Over recent decades, local governments have increasingly turned to impact fee programs as a way to force new development to pay for a portion (or the entirety) of the additional public infrastructure costs they necessitate within the community. But while impact fee programs are being implemented at unprecedented rates, interest groups that oppose the fees often claim they have adverse effects on the market for starter homes.

Given the importance of opportunities for homeownership among lower income families, it is critical to identify the effect of impact fees on construction rates for starter homes.

At the same time, a substantial number of empirical investigations have demonstrated that suburban communities (in comparison to central cities) are often able to successfully exclude lower-income households by enacting local land-use regulations that artificially inflate the cost of housing.1 This practice is disturbing because it reduces the availability of affordable housing opportunities in suburban communities, which are generally thought to offer lower-income households improved social and economic opportunities (Ihlanfeldt, 1999). Of the potential motivations that may underlie these exclusionary practices- the externality rationale, the fiscal rationale, and pure prejudice- the limited empirical evidence suggests that the fiscal motivation is likely the strongest of the three (Ihlanfeldt, 2004).

Based on the assumption that fiscal issues are a primary source of motivation for exclusion, Gyourko (1991), Altshuler and Gomez-Ibbanez (1993), and Ladd (1998) have all suggested that impact fees may reduce the level of exclusionary zoning and other

1 See Fishel (1990), Pogodzinski and Sass (1991) and Ihlanfeldt (2004) for reviews of the evidence on exclusionary land-use regulations.

1 types of exclusionary regulations, allowing more low income housing to be built within suburban areas. Brueckner (1997) argues that impact fees could have either a positive or a negative effect on a city’s growth rate but does not address the relationship between impact fees and exclusionary regulation or the possibility that fees could have differential effects on construction rates for homes falling into different price ranges. The limited empirical evidence on this issue is contradictory and suffers from a number of methodological deficiencies. Skidmore and Peddle (1998) find that impact fees reduce the number of new homes built each year while Mayer and Somerville (2000) find they have no significant effect on construction (as opposed to alternative regulatory tools that are found to significantly reduce the level of construction). Both studies, however, control only for the presence, rather than the level, of impact fees.

Our paper investigates the relationship between the level of impact fees within a jurisdiction and construction levels of affordable homes (and more expensive single- family homes) within outer suburban, inner suburban and central city areas. We develop a theoretical model with the following features: 1) water/sewer and non-water/sewer impact fees are treated distinctly,2 2) the effect of impact fees is allowed to differ across outer suburban, inner suburban, and central city areas, 3) the effect of impact fees is allowed to differ across different price ranges of the market for single-family homes. The predictions coming from the model guide our empirical investigation of the central question we seek to answer: Can impact fees, by reducing the fiscal deficit associated with lower-income housing development, lower the project approval costs for building

2 Non-water/sewer impact fees cover all types of fees that finance services that are otherwise funded through property taxes. Road, school, and park typically being the most common and largest in size.

2 affordable single-family homes and, in turn, generate more affordable homeownership opportunities for lower-income families in suburban areas?

Our unique panel data comes from a number of sources. A complete history of impact fee rates was obtained by contacting county planning offices for all metropolitan counties in Florida that have ever imposed impact fees on single-family residential developments.3 Impact fees are very popular in Florida; 36 of the 38 metropolitan counties in Florida have implemented impact fee programs. Although some counties adopted impact fees as early as the late 1970’s, our panel data base is limited to those years for which we are able to obtain the property tax rolls of the individual counties from the Florida Department of Revenue- 1995 to 2004. From the rolls we are able to identify the number of new homes falling into each of three different size categories that are built every year within each of our defined geographic areas.4 The final data item used to complete our panel data set are the Means City Construction Cost Indexes.5

With our data we estimate three different models.6 The first is a two way (time and space) fixed effects model that allows the change in the level of construction to depend upon the change in the level of both water/sewer and non-water/sewer impact fees. Area fixed effects account for unobserved heterogeneity across counties related to single-family housing construction and time effects control for factors that uniformly affect all areas over time. An important advantage of this specification is that impact fees

3 Impact fees in Florida are county-wide. While some cities do impose their own fees on top of those charged by the county, these fees are extremely small in all cases relative to the county. Metropolitan counties are defined using the most recent Census definitions. 4 The tax rolls also contain the two most recent sales vales for each property. From these data we construct county-specific repeat-sales price indexes for vacant residential land and for each size category (small, medium, and large) of single-family homes. These variables are used as controls in our empirical models. 5 Each county is assigned the index for the closest city (16 cities are available). 6 All models are estimated after first differencing the data. Also, to reiterate, these models are estimated separately for small, medium, and large single-family homes (using 1,500 interior square feet as the cutoff between small and medium and 2,200 interior square feet as the cutoff between medium and large). Finally, all models are estimated separately for outer suburban, inner suburban, and central city areas.

3 are allowed to depend upon area levels of single-family residential construction, thus mitigating the potential for endogeneity bias. The second model adds an area specific time trend to our first model. This model, generally referred to as the random trend model, allows each area to have its own time trend in construction rates. As such, the random trend model allows impact fees to depend upon area-specific trends in single- family housing construction, in addition to its level. While bias due to omitted variables is likely unimportant given our panel data after controlling for fixed effects, random growth trends, and aggregate time effects- we further investigate the robustness of our findings by estimating a standard stock-adjustment model (still including fixed effects for time and space) that adds land prices, housing prices, and construction costs as controls as well as including the lagged value for the stock of single-family homes.

Our early results show that while neither classification of impact fee affects construction rates within central cities; non-water/sewer impact fees do in fact increase construction rates for single-family homes in suburban areas in Florida. Specifically, higher impact fee levels are found to increase the amount of small and medium sized homes built within inner suburban areas (with no significant effect on large homes) while they increase the construction of large and medium sized homes (but not small) in outer suburban areas. These results are consistent with the predictions of our theoretical model: while the reduction in the fiscal burden causes both inner and outer suburban areas to lower the developer’s project approval costs, the demand for inexpensive homes is most elastic within inner suburban areas. Most importantly, construction of very affordable and moderately affordable homes is found to increase in inner suburban areas when non- water/sewer impact fees are increased. Hence, our results are consistent with the often

4 mentioned, but previously unsubstantiated, claim that impact fees may reduce the level of regulatory exclusion within suburban areas, allowing more affordable housing to be built within previously exclusive suburban areas.

References

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Brueckner, Jan K. 1997. “Infrastructure Financing and Urban Development: The Economics of Impact Fees” Journal of Public Economics, 66, 383-407.

Danielson, Michael N. 1976. “The Politics of Exclusionary Zoning in Suburbia”. Political Science Quarterly, 91(1), 1-18.

Gyourko, Joseph. 1991. “Impact Fees, Exclusionary Zoning, and the Density of New Development”. Journal of Urban Economics, 30, 242-256.

Ihlanfeldt, Keith R. 2004. “Exclusionary Land-use Regulations within Suburban Communities: A Review of the Evidence and Policy Prescriptions”. Urban Studies, 41(2), 261-283.

Ihlanfeldt, Keith R. and Timothy M. Shaughnessy. 2004. “An Empirical Investigation of the Effects of Impact Fees on Housing and Land Markets”. Regional Science and Urban Economics. 34(6), 639-661.

Ihlanfeldt, Keith R. 1999. “The Geography of Economic and Social Opportunity in Metropolitan Areas”. In A. Altshuler, W. Merril, H. Wolman, and F. Mitchell. (eds). Governance and Opportunity in Metropolitan America. Washington D.C.: National Academy Press, pp. 213-252.

Ladd, Helen F. 1998. Local Government Tax and Land Use Policies in the United States: Understanding the Links. Cambridge, MA: Lincoln Institute of Land Policy.

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Skidmore, Mark and Michael Peddle. 1998. “Do Development Impact Fees Reduce the Rate of Residential Development?” Growth and Change, 29 (3), 383-400.

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Yinger, J. 1998. “The Incidence of Development Fees and Special Assessments”. National Tax Journal. 51, 23-41.