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Why not impact fees?

Every so often, local jurisdictions consider assessing impact fees on development as a source of revenue for various types of infrastructure needs, including school construction.  The North Carolina Home Builders Association appreciates the need for additional capital school and other public facilities, but is adamantly opposed to the use of impact fees on development for that purpose.   In that regard, we offer the following observations:

• The imposition of impact fees for schools or for any other purpose requires the approval of the General Assembly via local act and such permission has not been granted to those seeking similar approval in more than a decade. Impact fees may not be lawfully imposed absent the permission of the General Assembly.  Few local governments have been granted the authority to impose impact fees of any type and virtually all of that authority was granted via local act between 1985 and 1989.  Since then, the North Carolina Home Builders Association (NCHBA) and other real estate groups have vigorously and successfully opposed the expansion of such authority beyond the few jurisdictions that had earlier obtained it.  Only two counties have obtained and implemented the authority to impose impact fees for schools (Orange and Chatham), and this authority was granted in 1987, two years before NCHBA and other real estate groups began opposing such local bills.  In total, only 22 cities and three counties have been given the authority to impose impact fees for any purpose, all prior to 1990.  Since that time, many other counties have unsuccessfully sought impact fee authority.

• It is unrealistic to expect the General Assembly to enact authority allowing local governments to impose impact fees. Because of the success the real estate industry has had in alerting legislators to the harmful effects impact fees have on the affordability of housing, it is fair to say that impact fee bills enjoy little support in the General Assembly.  No bill seeking to authorize an impact fee for a local government has even received a favorable committee vote in either the House or the Senate in more than a decade.  Because of this lack of support, few bills seeking such authority have even been calendared for debate in committee.  Accordingly, few local bills seeking to authorize impact fees are even introduced.  Thus, it is fair to say that it is unrealistic to expect the General Assembly to authorize the use of impact fees as a revenue source.

• Impact fees are unfair and regressive. Impact fees are paid, not by developers or home builders, but by the home buyer as a part of the purchase price of the new home.  Accordingly, impact fees reduce the affordability of housing, especially for local and middle income families.  As well, history shows that impact fees, once imposed, will inevitably increase – the national average is more than $10,000/unit – and spread to adjacent jurisdictions.  For example, Orange County established an initial school impact fee of $750, only to raise it first to $1500, then to $3000, and finally to $4400 per single-family detached house in the space of just a few years, and there has been discussion of increasing the fee to $10,000.  Impact fees in Cary, North Carolina, once totaled more than $15,000 per unit.  Cary has now reduced its impact fees by 30 percent to stimulate residential construction that had all but stopped because of the exorbitant fees and has indicated it will consider reducing them further because of the fees’ negative impact on local government revenue.  It is easy to see why impact fees substantially eliminate the dream of home ownership for families of modest means.  In order to be constitutional, impact fees must be assessed uniformly (i.e., the same impact fee must be assessed on a $50,000 home, including manufactured housing and Habitat homes, as on a $500,000 home).  Homebuyers of modest means cannot constitutionally be “exempted” from impact fees.  Likewise, everyone who purchases new housing is subject to any impact fee which may exist – including current residents who are purchasing “move up” or “empty nest” housing (i.e., impact fees may not legally be restricted to “newcomers”).

• Impact fees are discriminatory. Infrastructure improvements, especially for the public schools, benefit everyone in the community and, therefore, should be paid for by the public at large.  Imposing a special financial burden on just a small segment of the community – new home buyers (many of whom are current residents and longtime taxpayers) – is simple but not equitable.  Why is it fair for residents of existing housing who are contributing students to the school system (i.e., having the same impact) to escape their responsibility for school improvements?  As well, it is unfair to impose the cost of new schools (or other infrastructure) that benefit everyone on only one segment of society, i.e. the purchasers of new homes.  A survey in Wake County showed that only 34 percent of the buyers of new homes contributed new children to the public school system.

• Imposition of impact fees erodes public support for revenue bond issues. Impact fees are a dangerous prospect because they damage the sense of community necessary to support public institutions.  It is well known that support for future bond issues will become less likely among those who have been forced to pay an impact fee.  General obligation bond issues – a major tool for providing infrastructure improvements, including schools – will be more difficult to pass if voters are already paying impact fees.

• Impact fees are multiplied over the period of the loan.  The present value of an impact fee over a 30-year mortgage is more than three times the fee assessed.  For a $3000 impact fee, over a 30-year mortgage, homebuyers will be paying more than $9000 for housing.

• Residential development more than pays for itself. Impact fee proponents usually assert that residential development does not pay for itself (thus justifying a “special” fee on new home buyers to offset the claimed “burden” on existing taxpayers who are “subsidizing” residential development).  This assertion is simply not true.  Not only does new residential development “pay for itself”, it is one of the economic engines of any area.  Studies done by economists at UNC-Charlotte, UNC-Wilmington, N.C. State University, and Gardner-Webb University conclusively show that local government revenues from the construction of single-family dwellings is always greater than the public sector costs associated with such construction, both during the construction phase and every year of occupancy thereafter.  As well, it is a fact that commercial development follows residential development, and few would dispute the tax benefit to local governments of commercial development.  The City of Cary reduced its impact fees to spur residential construction when its own study found that residential construction generated $300 to $500 per unit more in local government revenues than what it was costing the city.

For the foregoing reasons, impact fees are not a realistic funding solution for school infrastructure or any other public need, nor are they fair or proper.

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