Impact Fees

An impact fee is a charge placed on new development by a local government to pay for the costs of infrastructure and public services compelled by these new projects so as to avoid passing the costs onto existing communities. Since the late 1940s, local governments in the United States have implemented impact fees to deal with rapid population growth's impacts on infrastructure. Impact fees were first used primarily to fund water and sewerage capital construction programs during the 1950s and 1960s. During the 1970s, local governments, faced with cuts by federal and state governments, coupled with antitax backlashes, expanded the use of impact fees to cover nonutility programs such as roads, parks, and schools as well as other public services. By the 1980s, local governments had extended impact fees to cover the costs of police, fire, and library services. Today, impact fees are used frequently by municipalities facing rapid growth in the American South and West. Since American courts upheld their legality, impact fees must pass a “rational nexus” in order to be enacted by local governments. Real estate and development interests, however, typically oppose local enactment of impact fees.

Growth and development can bring expensive costs to local communities, especially those in fast-growth areas. New residents and developments place demands on communities to build infrastructure, such as water and sewer lines, as well as roads. Also, such growth impacts community services as schools, parks, libraries, and emergency services. As property tax revenues increasingly failed to cover the expenses of new development, local communities turned to impact fees. An example of this would be a private developer proposing a new subdivision or commercial development in a community. The local government, through state-enabling legislation or local home rule, asks the developer for an impact fee to cover the costs of roads or a new school due to the demand caused by this new development. The government determines an impact fee by calculating the demand-to-capacity ratios for each capital facility by estimating the number and cost of facilities needed to meet a predetermined service level. The government assesses the impact fee based on facility demand of the proposed use based on its size, type, and location. The government determines the existing deficiency or inadequacy in the public facility or service. The developer may then pass on these costs to homeowners or renters.

Originating from environment law, impact fees first emerged as “in lieu” fees. These in lieu fees differ from impact fees in that they apply only to required dedications. Impact fees offer local officials more flexibility, applying prior to or during new development construction and to multiple types of construction: single-family homes, apartments, [Page 385]and commercial development. Impact fees may be closed- or open-ended. Early impact fee programs focused on closed-ended projects like utility infrastructure, where only those paying the fee receive the service. Today, impact fees may be open-ended as well, such as for a library or park in which not all users may have paid an impact fee for use of these facilities. New uses for impact fees include a linkage fee paid by commercial and industrial development to provide low-cost housing for workers.

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