August 03, 2015

Impact Fees: Who’s Right, Profs or Developers?

By Mary Newsom
– The Charlotte Observer  –

Developers say fees raise housing costs; two academics are skeptical.

When some economics and public financing professors who don’t know "REBIC" from "ribbit" say impact fees don’t, after all, automatically raise housing prices, they get my attention.

That’s the constant claim from many Charlotte developers, including the local lobby group the Real Estate and Building Industry Coalition, when impact fees are brought up. Elected officials generally take it as truth.

I think that assumption deserves a deeper look. Here’s why: I recently went to a conference on economic development at the Lincoln Institute of Land Policy, a nonpartisan think tank in Cambridge, Mass.

Jeffrey Chapman, an economist at Arizona State University’s School of Public Affairs, and Rex Facer, an assistant professor at the Romney Institute of Public Management at Brigham Young University, were discussing taxes.

Across America, they said, local governments had hit limits on revenue options. Meanwhile voters want better services. So the governments have devised new ways to bring in money.

One of them, they said, was impact fees, which are widely used. They’re fees developers pay when housing is built, to help governments deal with the impact of the development, such as street improvements, new schools or parks. N.C. local governments can’t adopt them without the legislature’s OK.

But, a California journalist said, developers say impact fees drive up the cost of housing.

The professors scoffed.

"You have to be skeptical," Chapman said. "I think the market sets the price of the house, not the developer." Developers base prices on what people will pay, he said. Facer agreed.

I asked if there was research to back them up. Facer said the only research showing a direct relationship between impact fees and housing prices was work that wasn’t peer-reviewed and was, in his view, badly done. "It’s far from a settled issue," he said.

I’m a skeptical sort. I ran the professors’ theory past a developer I know who also doesn’t know REBIC from ribbit: Russell Bloodworth, executive vice president of Boyle Investment Co., a venerable Memphis firm. He’s a colleague of mine at the Knight Program for Community Building at the University of Miami.

Developer: Both are right

Bloodworth has been setting subdivision lot prices for 35 years. He studied housing demand as a Yale graduate student. He has worked in places with and without impact fees. Are the professors right, I asked.

"They’re right, and the homebuilders are right," Bloodworth said. "It’s an extremely complex question."

The economist is right, he said. Pricing is related to both the cost of building and to demand. In a "hot" market, demand can play a stronger role.

But over time, he said, pricing will gravitate toward the "cost" factor.

In other words, right after impact fees are adopted, housing costs probably don’t go up. Developers who began a project just before the fees go in get a little windfall. Others will try to cut their costs, either paying less for land or building more cheaply.

But within three or four years, the impact fee will be fully taken in to the cost structure, Bloodworth said. He also said he thinks impact fees are "a very imprecise tool. It’s just so unfair."

Give up profit? No way.

Like the two professors, he believes property taxes – although loathed by many – are relatively fair and not a regressive form of taxation. He also would favor a real estate transfer tax over impact fees. "It raises a lot more money than impact fees. It spreads the pain."

Then I ran the professors’ theory past Charlotte developer Tony Pressley, generally unafraid to be outspoken. He agreed with Bloodworth. "Developers aren’t going to give up profit," he said.

Even so, he said, Charlotte’s old model for paying for basic services – leaning heavily on property taxes – is broken. "We’ve got to find another way to fund growth and infrastructure."

He’s right. But what should it be? Impact fees and land transfer taxes are tough to sell politically, especially in Raleigh.

Policy makers need unbiased, expert information. Then they have to determine for themselves: What’s fair? What’s realistic? What’s the cost?

And one last question: What’s the cost of doing nothing?