“Impact Fees” to Hold Down Property Taxes Actually Drive Them Up

Published July 18, 2014

The first installment of this year’s property tax bill on my house came due in June, and all around the country, the first installment of the annual property tax bill recently has come due or soon will.

Numerous polls over the years have identified the property tax as one of the most hated taxes—if not the most hated tax—in America. Ironically, something cities and counties across the country have enacted to reduce property taxes actually drives them higher.

This is the “impact fee,” also often called a “developer donation fee.” The fee is charged to builders of new houses; generally, the bigger the house, the bigger the fee. In my hometown, a four-bedroom house carries a $14,295 fee. In some locales the fee is lower; in others it’s much higher.

Developer or impact fees began appearing in the 1980s, when populations of many suburbs of major cities were surging. The population surge strained schools, parks, libraries, and other local services.

As they struggled to keep up with rapid population growth, local officials began pointing to the one-year lag in property tax collection. Tax bills sent out this year are for property owned last year. The politicians argued buyers of newly built houses were skating by for as much as a year, using schools, roads, libraries, and other services without paying property taxes to help fund them. Their solution was to begin charging impact fees to builders of new houses, arguing the fees make up for the lag in property tax collections.

Here are some problems with that:

  • Impact fees artificially raise the sale prices of new houses.
  • Property taxes are based on the market value of a piece of property.
  • Artificially high selling prices mean artificially high market values, which means artificially high taxes.

If the impact fee really were imposed as a one-time charge to make up for the one-year lag in property tax collections, then it would be proper for tax assessors to reduce the market value of the property by the amount of the fee. This would in turn drop the assessed value upon which the property tax is based. But this does not happen. The artificially higher market value is built into the assessed value of the property for the rest of its existence.

Furthermore, impact fees often far exceed the property taxes on homes with those assessed values, and the money rarely goes to all taxing districts. Instead, it’s usually retained by the county or municipality and occasionally disbursed for a handful of things such as new parks or school buildings. My property tax bill has 16 different taxing districts. Almost none of them receive impact fee money.

My town officials are considering using impact fee money to build an $8 million aquatic center/recreation facility. This sort of use of impact fee money is typical, but it is hardly a core function of government—a nearby YMCA has long had a swimming pool and recreation facility and is undergoing a multimillion-dollar expansion that will use no tax dollars.

This gives the lie to the notion that impact fees make up for the months when people are living in new houses and using government services without paying taxes. If this were the true purpose, the fee would be no higher than the tax bill that would be levied on a house before the fee adds to its price, and the money would immediately go to every taxing district in the area, from tiny mosquito abatement district to big school district. It would not be held for years to grow into a big pile of money for a small number of tax bodies and uses, some of which are dubious.

There’s plenty to dislike about the property tax. A fee that makes housing less affordable and drives tax bills higher is one of them.

[Originally published at Inside Sources]