_____________________________________________________________________________________________ PAYING FOR PROSPERITY: IMPACT FEES AND JOB GROWTH Arthur C. Nelson Metropolitan Institute at Virginia Polytechnic Institute Mitch Moody Georgia Institute of Technology A Discussion Paper Prepared for The Brookings Institution Center on Urban and Metropolitan Policy June 2003 _____________________________________________________________________________________________ THE BROOKINGS INSTITUTION CENTER ON URBAN AND METROPOLITAN POLICY SUMMARY OF RECENT PUBLICATIONS * DISCUSSION PAPERS/RESEARCH BRIEFS 2003 Civic Infrastructure and the Financing of Community Development Stunning Progress, Hidden Problems: The Dramatic Decline of Concentrated Poverty in the 1990s The State Role in Urban Land Development City Fiscal Structures and Land Development What the IT Revolution Means for Regional Economic Development Is Home Rule the Answer? Clarifying the Influence of Dillon’s Rule on Growth Management 2002 Growth in the Heartland: Challenges and Opportunities for Missouri Seizing City Assets: Ten Steps to Urban Land Reform Vacant-Property Policy and Practice: Baltimore and Philadelphia Calling 211: Enhancing the Washington Region’s Safety Net After 9/11 Holding the Line: Urban Containment in the United States Beyond Merger: A Competitive Vision for the Regional City of Louisville The Importance of Place in Welfare Reform: Common Challenges for Central Cities and Remote Rural Areas Banking on Technology: Expanding Financial Markets and Economic Opportunity Transportation Oriented Development: Moving from Rhetoric to Reality Signs of Life: The Growth of the Biotechnology Centers in the U.S. Transitional Jobs: A Next Step in Welfare to Work Policy Valuing America’s First Suburbs: A Policy Agenda for Older Suburbs in the Midwest Open Space Protection: Conservation Meets Growth Management Housing Strategies to Strengthen Welfare Policy and Support Working Families Creating a Scorecard for the CRA Service Test: Strengthening Banking Services Under the Community Reinvestment Act The Link Between Growth Management and Housing Affordability: The Academic Evidence ii What Cities Need from Welfare Reform Reauthorization Growth Without Growth: An Alternative Economic Development Goal for Metropolitan Areas The Potential Impacts of Recession and Terrorism on U.S.Cities TREND SURVEYS 2003 At Home in the Nation’s Capital: Immigrant Trends in Metropolitan Washington Welfare, Working Families and Reauthorization: Mayor’s Views Beyond Edge City: Office Sprawl in South Florida Boomers and Seniors in the Suburbs: Aging Patterns in Census 2000 Rewarding Work Through the Tax Code: The Power and Potential of the Earned Income Tax Credit in 27 Cities and Rural Areas 2002 Modest Progress: The Narrowing Spatial Mismatch Between Blacks and Jobs in the 1990s Smart Growth: The Future of the American Metropolis Living on the Edge: Decentralization Within Cities in the 1990s Timing Out: Long-Term Welfare Caseloads in Large Cities and Counties A Decade of Mixed Blessings: Urban and Suburban Poverty in Census 2000 Latino Growth in Metropolitan America: Changing Patterns, New Locations Demographic Change in Medium-Sized Cities: Evidence from the 2000 Census The Price of Paying Taxes: How Tax Preparation and Refund Loan Fees Erode the Benefits of the EITC The Importance of Housing Benefits to Housing Success Left Behind in the Labor Market: Recent Employment Trends Among Young Black Men City Families and Suburban Singles: An Emerging Household Story from Census 2000 TRANSPORTATION REFORM SERIES Improving Efficiency and Equity in Transportation Finance Fueling Transportation Finance: A Primer on the Gas Tax Slanted Pavement: How Ohio’s Highway Spending Shortchanges Cities and Suburbs TEA-21 Reauthorization: Getting Transportation Right for Metropolitan America iii FORTHCOMING Changes in Real Estate Finance and Their Effect on Commercial Development in Urban Areas Reshaping America: The Opportunity to Build America’s Future Upstate New York’s Population Plateau: The Third-Slowest ‘State’ * Copies of these and previous Brookings urban center publications are available on the web site, www.brookings.edu/urban, or by calling the center at (202) 797-6270. iv ACKNOWLEDGMENTS The Brookings Institution Center on Urban and Metropolitan Policy thanks the Fannie Mae Foundation, the George Gund Foundation, the Joyce Foundation, the John D. and Catherine T. MacArthur Foundation, and the Charles Stewart Mott Foundation for their support of our work on metropolitan trends. The center’s Metropolitan Initiative aims to better understand the mix of market, demographic and policy trends that contribute to the growth and development patterns we see in metropolitan areas nationwide and to identify where possible, options for reform. Also, a detailed review of this paper by Anthony Downs, a senior fellow at the Brookings Institution, proved invaluable. ABOUT THE AUTHORS Arthur C. Nelson is professor and director of graduate studies in urban affairs and planning at the Virginia Tech Alexandria Center where he is also senior fellow with the Metropolitan Institute. Mitch Moody is a doctoral student in city and regional planning at the Georgia Institute of Technology in Atlanta, GA. The authors thank Andres Skaburskis for especially thoughtful guidance in theoretical formulation and modeling, and William Drummond and Michael Tietz for additional insights. Comments on this paper can be sent directly to Chris Nelson who may be reached at [email protected] The views expressed in this discussion paper are those of the authors and are not necessarily those of the trustees, officers, or staff members of The Brookings Institution. Copyright © 2003 The Brookings Institution v EXECUTIVE SUMMARY Growth costs money. And increasingly many municipalities, confronted with tax-averse electorates, have turned to impact fees¾one-time charges against new development¾to pay the costs of growth. Traditionally, these costs have been financed by property taxes. However, those revenues have proven mostly inadequate to fund the roads, water and sewer infrastructure, and schools required by new residential and commercial development Impact fees, though, are not universally accepted. Conventional wisdom among some private interests and public officials is that impact fees constrain local economic development, serving as a de facto “tax” on capital, stifling investment, and driving job growth to other fee-free jurisdictions. Supporters argue impact fees act as an investment in the community, spurring economic growth through the timely provision of new infrastructure and the expansion of buildable land. Given that impact fees often pay for public infrastructure projects, understanding the relationship between impact fees and local economic development, defined here as local job growth, is key. This report addresses the controversy around impact fees by reviewing the academic literature concerning the effect of impact fees on employment and the economy generally. In addition, the report presents a new analysis of the relationship between impact fees and job creation by assessing impact fee and economic data, assembled for the period 1993 to 1999, for the 67 counties of Florida. Overall, the paper finds that: · Property tax revenues increasingly fail to cover the full costs of the infrastructure needed to serve new development. More and more, political resistance to property taxes compromises the conventional way to pay for infrastructure needs brought on by new development. Consequently, new property values would have to be very high or property tax rates raised across the board to pay for the full array of infrastructure needs For example, one study of a rapidly growing city in Georgia in the 1990s found that the city faced a 50 percent shortfall in funding the new infrastructure demanded by new development and would need to raise $90 million more than it projected in total revenues from all state and federal transfers and property taxes. · Impact fees, like user fees, offer a more efficient way to pay for infrastructure than general taxes, and ensure benefits to those who pay them. Academic literature suggests that the aggregate benefits of impact fees improve efficiency in the provision of infrastructure. While impact fees often do not reflect the full price of infrastructure improvements, fees do make the economic linkage between those paying for and those receiving benefits more direct, and so promote economic efficiency. The obvious direct economic benefits include the actual infrastructure investment, such as new roads, new schools, and new water and sewer extensions. Indirect benefits include improved predictability in the marketplace, knowing when and where infrastructure investment will occur, and that all developers are treated equitably. vi · Impact fees increase the supply of buildable land. In the absence of impact fees, local governments may not have the revenue necessary to accommodate growth. With impact fees, they gain necessary infrastructure¾ water, sewer, drainage, and road facilities¾ to open new parcels of land development. One study also found that impact fees may reduce uncertainty and risk for developers by giving them a reasonably predictable supply of buildable land. · Impact fees have complex effects on housing prices. One particularly thorough study of the effect of impact fees on housing prices found that fees reduced land prices by the amount of fees paid but also raised finished house prices by about half