Brett
M. Baden and Don. L. Coursey
In their Harris School working paper, "An
Examination of the Effects of Impact Fees on Chicago's Suburbs," University
of Chicago researchers Brett M. Baden and Don L. Coursey find that municipal
impact fees had a substantial influence on the prices of single-family
homes in eight Chicago suburbs between 1995 and 1997. Impact fees are
one-time charges imposed by municipalities on residential builders to
recover part of the costs of infrastructure improvements necessary for
expanded development. Municipal planners use these fees to force developers
and new homebuyers to pay for their marginal impact upon municipal services,
e.g., new schools, sewers, roads, parks, and other public amenities.
Baden and Coursey note that developers respond to such fees by building
less housing, building in areas less suited to commuting patters and
community planning, and by building larger and more expensive homes.
Moreover, the researchers observe that this trend may price low and
middle-income families out of the suburban housing market, since developers
are encouraged to build higher-priced homes in order to recover the
fees through higher margins.
Researchers also find ambiguity in the appropriate level of impact fees
and note that government officials may charge developers more than the
appropriate level since these charges are often hidden from the homebuyer.
Baden and Coursey suggest that it may be more efficient to charge new
residents according to the quantity of services used, rather than to impose
a complex and cumbersome fee structure on new homes. This study has distinct
policy implications since impact fees are so closely linked to the price
of housing (as they are being passed on to homebuyers rather than being
paid by developers), and since there exists an ambiguity regarding the
correct level of fee assessment.
Findings
The empirical results of this research conclusively show that fees increase
the price of new and existing homes. Baden and Coursey find that municipal
fees increase new housing costs by 70% to 210% of the actual fee imposed,
which ranges from $2,224 to $8,942 for an average four bedroom home examined
in the study. Moreover, fees are increased repeatedly, dramatically, and
unpredictably, making it difficult for developers simply to incorporate
impact fees into the fixed-cost components of their projects. For new
homes, large price increases that are generated by relatively small impact
fees are probably due to the uncertainty surrounding the range of regulatory
fees and the extent of possible construction delays.
The price of existing homes also was affected significantly by impact
fee taxation. Although there are no fees assessed on the sale of existing
homes, Baden and Coursey find that the existence of fees increased the
price of older homes by amounts similar to those for new homes. As the
prices of existing homes increase, fewer home sales occur. The authors
cite previous research that found 29% to 31% declines in residential growth
rates in municipalities with impact fees, as increased prices led to fewer
sales.
The authors also found that the largely hidden nature of impact fees
may provide incentives for municipal officials to act in a fiscally irresponsibly
manner. Moreover, these assessments are likely to be inefficient due to
the difficulty in estimating a resident's use of a municipal service.
New residents may use municipal services more or less than the actual
cost of the fees, which are typically estimated by complex formulas or
based on land valuations. The authors cite an example of a senior citizens'
center that was charged impact fees for city services and infrastructure
that they would mostly likely underutilize. In this case, Baden and Coursey
suggest that municipalities may be more efficient in allocating the costs
of these services based on quantity of services used, rather than on a
universal formula. The inherent ambiguity of impact fees suggests several
important issues for housing development policy. These include rent-seeking
(unrestrained budget maximization by municipal politicians), subsidization
of existing households at the expense of new entrants, possible exclusionary
practices toward minorities and the poor, and equity concerns regarding
the payment for and distribution of benefits.
Impact fees have significant influences on the racial and class composition
of neighborhoods. Specifically, impact fees may place a disproportionate
burden on poor and middle-income homebuyers because fees represent a higher
percentage of the sale cost of a lower-priced home than a higher-priced
home. Therefore, impact fees are more likely to push moderate-income homebuyers
out of the market than more affluent buyers. Further, to the extent that
income is correlated with race, impact fees may create barriers to the
migration of minorities into the suburbs.
Background
The authors use an empirical model to assess the effect of impact fees
on new and existing housing costs in eight Chicago suburbs: Aurora, Bolingbrook,
Burr Ridge, Darien, Downers Grove, Glen Ellyn, Naperville and Wheaton.
The model incorporates sales prices, housing characteristics, suburb features,
and the amount of fees. The model posits that the sale price of a new
house is a function of housing characteristics and the impact fee structure.
This approach has been used in previous empirical investigations of the
effect of impact fees. These eight western suburbs provided fee structure
data, and the authors analyzed housing sale data from the Multiple Listing
Service of Northern Illinois.
The imposition of impact fees in communities across
the country is largely guided by legal standards set in two court cases
originating in California, and ultimately decided by the U.S. Supreme
Court. In 1987, the Court's decision in Nollan v. California Coastal
Commission outlined the "rational
nexus test" requiring that city projects be directly linked to impact
fee regulations. In 1994, the Court ruled in Dolan v. City of Tigard that
fee requirements must be "roughly proportional" to the municipal project
proposed.
Policy Briefs are designed to highlight key
policy implications and to broaden the dissemination of policy-related
research. These Briefs are funded by the Irving B. Harris Graduate
School of Public Policy Studies at the University of Chicago.
Download a copy
of this study.
For more information, contact Jamie Rosman at (773) 702-2287 or HarrisSchool@uchicago.edu.
