When New Housing Pays for Old Infrastructure

Impact fees that shift costs from existing homeowners to new ones has a feel of generational and class theft

By Scott Beyer of The Independent Institute. 

"Across the United States, local governments are confronting a problem that has accumulated for decades: aging infrastructure with massive deferred maintenance. Water lines, sewer plants, roads, schools, and more need modernization and sometimes replacement. In theory, the costs should be shared broadly among those who use the infrastructure. But increasingly, jurisdictions solve these budget shortfalls by charging “impact fees” and other development extractions from new construction. This amounts to an unfair shifting of costs away from existing homeowners to new ones, in a dynamic that smells of generational and class theft.

Impact fees were first conceived as a rational planning tool. If a new subdivision required an additional water main, traffic signal, or elementary school, it made sense for the development creating that growth to fund the incremental expansion on a pro-rata basis. That logic remains sound.

But over time, government agencies have gotten carried away with impact fees and similar policies (such as proffers and special assessments). The whole concept has drifted beyond paying for marginal growth-related costs, and become a piggybank for decades of underinvestment in infrastructure that mainly serves current residents.

Tracking down data is hard, given that fees are fragmented across various schedules, jurisdictions, and project types. But the costs to developers and homebuilders, who pass them onto purchasers, are very real.

One example is in San Diego and surrounding Southern California cities. Cumulative impact fees tied there to schools, transportation, parks, utilities, and affordable housing mandates have in some cases veered into six figures per home before construction even begins. School impact fees alone currently run $5.38 per square foot for residential construction within the city’s Unified School District (which is an odd way to calculate it, since larger homes don’t necessarily produce more school-aged children – often it’s the opposite).

State policies contribute to this dynamic. For example, Proposition 13 limits property tax growth by tying annual assessments to a property’s initial purchase price. This means long-time homeowners benefit from low tax burdens and dramatic home appreciation, while buyers inherit escalating infrastructure costs that get embedded into the price of newly-constructed housing.

A similar controversy emerged in Loudoun County during the suburban boom coming from Washington, D.C. The county extracted proffers from developers in exchange for rezonings, often on a case-by-case basis that had the feel of bribery. These proffers funded road widenings, intersections, schools, parks, libraries, and public safety facilities, adding an estimated $30,000-$50,000 per unit – or in many cases much more.

For context, the median home price in Loudoun County is around $800,000 and the property tax rate is $0.805 per $100 in assessed value. This means that the typical homeowner there is paying around $6,400/year in property taxes, far less than the impact fees that new homeowners pay. It should be noted that these new homeowners, upon moving in, are then required to also pay property taxes, rendering their impact fees a sort of duplicative entry tax.

In Austin and the broader Central Texas region, explosive population growth has strained water and wastewater systems. A Texas A&M study found that the city’s development fees averaged $41,303 per housing unit for infill development, which is 2.5x higher than the Central Texas average.

Such examples abound throughout America. I’ve found that fees are generally highest in areas where NIMBYism is strong; and where new development is viewed as a quality-of-life infringement rather than an economic development benefit. Fees are also frequently used as a redistribution tool, with wealthier districts funding poorer ones.

The common thread in any of these cases is political convenience. Raising taxes broadly on existing residents is unpopular, as is increasing utility bills for all users. But charging developers and future homeowners is easy—the former is a boogeyman that garners no public sympathy, while the latter is an “invincible” constituency that has no organizing ability prior to moving into a locale.

The result is an unequal arrangement in which Gen Z and Millennial households—who account for nearly half of home purchases but have far lower net worth than older generations—are forced to shoulder disproportionate infrastructure burdens.

A better approach would fund infrastructure through direct user fees and broad-based revenue sources that distribute costs among everyone who benefits from the system. Water and sewer infrastructure should be financed primarily through utility rates tied to usage; roads through fuel taxes, tolls, or mileage-based fees; and stormwater systems by charging properties based on their impervious surface or other impacts. There should also be a clearer distinction between capital improvements that expand system capacity and routine maintenance or replacement of existing infrastructure. The latter should be funded primarily by the residents and businesses already served by those systems, not newcomers.

By blurring these categories and treating new development as a convenient source of revenue, many local governments have shifted infrastructure costs from existing users onto future residents, increasing housing costs and creating an inequitable transfer of financial responsibility from one group to another."