Taking the right from local governments to finance public services with revenues from development impact fees: dishonest, disastrous, and dangerous–another short-sighted bill in NC?

Another bill in North Carolina’s General Assembly is posing questions of social justice. House Bill 436 was introduced in April and it seeks to remove from local governments the right to impose development impact fees on new construction.

This ruling represents a win for urban developers, real estate industries and those adept to take political advantage of changes in the spatial distribution of voters. In turn, House Bill 436 is a loss for current and new residents, but particularly, for residents of districts that are “well-suited” for gerrymandering. Arguably, it is also a loss for local communities as they will be exposed to additional environmental degradation.

Development impact fees are one-time charges to developers for the construction of new residential or commercial structures. These fees allow local governments to raise revenue for financing the provision of additional public services to new residents and dwellers. Impact fees are levied to pay for the establishment, expansion, restoration and maintenance of a broad range of public infrastructures and services like roads, parks and other recreational areas, library services, fire protection and police services.

Impact fees are a relatively new fiscal tool for local governments. At least in the US, local governments have traditionally relied on other methods to finance new public infrastructure. The more familiar ones are cost-sharing schemes and property taxes. Under cost-sharing schemes, local governments can finance new infrastructure and capital improvements by issuing infinite-maturity bonds with interest payments shared among all taxpayers in the jurisdiction. Alternatively, to finance the new costs of serving larger communities, local governments can raise property taxes in the growing districts. Under this option, only residents of the growing district, share the cost of the incremental costs imposed by new population pressures.

Property taxes and long-term (if not perpetual) financing are approaches that pose basic questions of equity and social justice to all municipal governing bodies. Should the government borrow money and pay it back with revenue collected from future generations of residents? Should the government use currently available funds (collected from current and prior residents) to pay for future capital improvements? Does raising property taxes drive current residents out of their growing district pushing them to stagnant districts that may be stagnant because they do not offer desirable residential features or worse, because they are plagued with dysfunctional institutions and social disorder?

Impact fees are an interesting policy tool to governments confronting these issues. Unlike perpetual cost-sharing schemes, they do not raise “generational equity” concerns, and unlike property taxes they do not raise the tax burden to existing property owners. With impact fees, all costs of financing new capital improvements and the expansion of public services coverage are born by urban developers alone. In economics jargon, impact fees are very much like a Pigouvian tax on new development, and as Pigouvian taxes they serve two purposes. The first is to raise revenue for financing public works, but perhaps most importantly, is to provide additional incentives for developers to slow down the pace of development in order to arrive at what economists call the socially optimal level of development.

The socially optimal level of development is that which maximizes the aggregate level of satisfaction among all groups affected by urban development: developers, new residents, current residents, local governments and even the natural environment. Moreover, on top of furthering the prospect of reaching a social optimum, impact fees are the least intrusive tool available to local governments. Meaning that, if the level of the fee is set correctly, private agents can reach a socially efficient outcome by means of engaging in otherwise undistorted market transactions.

But if impact fees are so great, why do representative in the North Carolina’s General Assembly want to get rid of them with House Bill 436?

The official story behind this bill was the misuse of impact fees by the town of Carthage in Moore County.[1] The case brought up questions about the misuse of power by local governments—a poster child for advocates of small government who happen dominate North Carolina’s legislature. However, a closer look to the group lobbying for House Bill 436 shows it is difficult to disentangle political ideology from private profit when it comes to the motives behind this particular legislative move.

The representative who introduced the bill operates a real estate leasing and rental company and has gotten campaign donations from developers and others in the building industry.[2] In the eyes of developers and real estate professionals, impact fees are an obnoxious expense that lowers the profitability of a project. To protect their business, they lobby against the imposition of impact fees in the political platform by arguing that they are a “hidden tax” that slows down growth by pricing people out of homes whose price is “artificially” inflated by the impact fees.

The truth, however, is that impact fees do not artificially raise prices. They simply force the market price to reflect the real value of the property after taking into account information about future necessary investments in infrastructure and institutions–information that the property market had failed to absorb because these new investment costs are generally not born entirely by the parties involved in the construction and sale of a new property. These costs are what economists call externalities, and in this particular case, the externalities include congestion costs.

The evidence, however anecdotal, is not supportive of the argument that impact fees either slow down or deter growth. Examine the case of Florida for example. Florida is among the states that most heavily relies on impact fees for financing new capital improvements, and Florida’s highest-growth decades followed the imposition of impact fees.[3] Depending on the municipality, developers are charged from $270 to $1440 to cover expenses related to services like parks and recreation, water, sewer, fire and rescue, schools, and transportation.

Many fast-growing counties in FL, including the fastest-growing county in the nation, have relied on impact fees to maintain their districts attractive, safe, comfortable and nourishing. If local governments are deprived from the option of imposing impact fees, their only means to meet fiscal goals are either to avoid new expenses–which would drive the value of growing districts down as they would offer less of a service and of lower quality, or to use tools like the issuing of perpetual bonds and the raising property taxes–alternatives that raise concerns of social justice.

As I have argued, there does not seem to be a strong case for abolishing the imposition of impact fees in North Carolina. Developers and business men in the building industry will certainly benefit from this ruling. In turn, local governments will have to find ways to meet their fiscal responsibilities and these methods will likely lead to further social disruption by triggering inter-generational tension and reshaping the spatial distribution of income groups.

However grim this story may seem, it does not end here. Taking from the people to give it to the man in the name of small government is wrong. Yet, it can also be ugly and dangerous if someone sees in this situation an opportunity for manipulating district boundaries and establishing political advantages for a particular party or political group.  Having been a resident of North Carolina for 4 years, I fear this is rather plausible scenario.

I believe that government abuse of power is indeed something to be weary of. However, the manipulation of political discourse to further someone’s private economic interest represents an equally unacceptable abuse of power. Moreover, given that it is public leaders that claim to be the protectors of the political process who are advancing their private interest by denouncing other public actors for advancing their private interests, I find this call for the abolition of impact fees doubly hypocritical and immoral. To end, I fear House Bill 436 may also be stupid if this change in law results in a situation where someone can find the opportunity to take political advantage of social disruption.

REFERENCES

[1] http://www.newsobserver.com/news/politics-government/article142164204.html

[2] http://www.newsobserver.com/opinion/editorials/article142476799.html

[3] https://flaglerlive.com/44763/impact-fees-faq/

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