By a pleasant coincidence, The Urbanophile wrote about impact fees (aka development charges) today. This follows my admission that I don’t know much about the economics of development charges, and a piece in The Standard warning against raising Niagara Region’s charges.
Impact fees are fees charged to developers, typically residential developers, to help fund the capital expansion needs of public services such as sewers, parks, or roads resulting from the new housing units that will be added. This can be thousands of dollars per house in total. Also, developers are often required to construct 100% of utilities and infrastructure in the interior of their development, donate land for schools or fire stations, or even do localized road improvements. The idea is that the construction of the house creates a municipal liability that would otherwise be unfunded without the fee.
There are a couple of problems with impact fees. The first is that they are imposed on a locality by locality basis. Competition is good, but competition can also force all but the most attractive towns to limit their collection in order to entice developers. This creates economic development in the short term, but adds to the unfunded liability balance that will ultimately do in the city. The second problem is that these fees are not nearly high enough.
An externality is a cost or benefit (often a cost) that accrues to someone not party to a transaction, I think even most free marketers would suggest that externalities are a problem. In this case, the unfunded liabilities are negative externalities of development. The developer pockets the vast bulk of all of the profits and benefits flowing from his new subdivision. The residents of the whole town, both today’s and tomorrow’s, and even state and federal taxpayers, inherit the bill to make good on these costs.
He goes on to give an example of the burden a municipality has been saddled with by ‘disposable’ development. If you didn’t skim over that quote I suggest you read his entire post.
I am not entirely opposed to subsidizing development. The market can do a poor job of providing affordable housing, for example, and brownfield sites are notoriously difficult and expensive to clean up. But as with any public investment, we have to expect reasonable returns. It is unwise to subsidize a bare-bones suburban development that is going to decline and decay in a matter of years (not to mention imposing less obvious costs to health and social capital) for the short-term gain of a few jobs and property taxes.
When development charges are too low, the supposed economic benefits of development may be outweighed by the long-term costs.