Local government financing is a perennially vexing issue for local politicians, who are trying to meet the changing needs of constituents while also balancing the budget of their city, county, school district or other agency. Local governments generally have limited options for generating the money they need to build and expand infrastructure, including roads, parks, drainage systems and educational facilities. While increasing property taxes may be an option for bringing in more revenue, it is one that often prompts aggressive opposition from homeowners and business owners. Voters have been reluctant to increase or create other types of taxes. To help pay for growth, some government agencies charge impact fees on new development. An impact fee is a one-time charge imposed on new construction such as housing developments or office complexes and is designed to offset the financial impact the project will have on local infrastructure.

Cities in states with property-tax limits — in California, Colorado and Florida, for example – were among the first in the country to adopt impact fees decades ago. Today, hundreds of government agencies charge these fees in amounts that vary widely, according to the jurisdiction and the type of infrastructure being affected. School impact fees tend to be highest, according to a 2012 report from the government-consulting firm, Duncan Associates. That report, based on a national survey, identified Arizona, California and Florida as the states with the most impact fees.

While impact fees provide an additional source of revenue, government officials have worried they may discourage development and hurt job growth. In some parts of the U.S., local governments have begun offering impact-fee discounts to companies that construct buildings that will bring certain types of jobs, including high-wage and industrial jobs, to an area. Scholars continue to investigate the issue but their research has sometimes produced conflicting results. However, a 2015 study published in Economic Development Quarterly, “Impact Fees and Employment Growth,” looks at impact fees from a different angle. Adam T. Jones of the University of North Carolina-Wilmington examined the effect that levying fees on commercial development has on three sectors of employment: service jobs, retail jobs and manufacturing jobs. He used 30 years of employment and demographic data from 67 Florida counties to create a natural experiment on the fees’ influence.

The study’s findings include:

• There is a “mixed relationship” between the use of commercial impact fees and changes in employment. Impact fees influence job sectors differently.
• Florida counties with impact fees experienced greater job growth in the service sector.
• Florida counties with impact fees experienced slower job growth in the manufacturing sector.
• Impact fees had a small or insignificant impact on retail employment.

The author notes that Florida’s business patterns might slightly skew employment toward service and retail employment as the state is “more retail- and service-oriented than the rest of the country.” He suggests further research to explore how different industries view impact fees, as some may consider them to be a tax with little or no benefit and some may see the fees as an investment in infrastructure. The results of this study combined with prior research on residential impact fees indicate that impact fees may benefit residential and service sectors but have consequences for industrial development. “Whereas [impact] fees are theoretically an efficient way of financing infrastructure, they cannot be considered in a vacuum …,” Jones states. Policymakers need to understand that some companies may build within neighboring communities to avoid impact fees and still be able to serve the same general market.

Related research: Jones explains other research he did on impact fees in a June 2015 study published in the Atlantic Economic Journal titled “Fees and Firms: An Empirical Examination of the Relationship Between Development Impact Fees and Firms.” A 2014 study from two Korean universities and Florida State University, “A Multilevel Governance and Growth Management: The Use of Impact Fees by Florida Cities,” looks at how local governments decide whether to impose impact fees.

 

Keywords: taxes, local government, impact fees, tax system, commercial development, residential development, employment, finance