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Business Observer Friday, Nov. 14, 2003 15 years ago

Growth Pays Its Way and More

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Excerpts from a report on whether growth pays its way by Research economist James F. Dewey, of the University of Florida's Bureau of Economic.

Growth Pays Its Way and More

Editor's note: Research economist James F. Dewey of the University of Florida's Bureau of Economic and Business Research recently completed an analysis of whether growth pays its way or whether impact fees are necessary for the Home Builders Association of Manatee County and the Gulf Coast Builders Exchange. Following are excerpts of his report, the entire text of which can be found on the Manatee County government Web site:

By James F. Dewey

If new development does not generate enough public revenues to cover associated public costs, economists advocate impact fees as a way to ensure that the private and social marginal costs of development are aligned. If, however, the public revenues associated with new development exceed public costs, impact fees drive a further wedge between the public revenues and costs associated with new development, inappropriately distorting development decisions and enriching existing development at the expense of new development.

I consider whether new development in Manatee County generates sufficient public revenue to cover all additional operating and infrastructure costs due to the new development, given a requirement that the current level of public service be maintained into the distant future.

To answer this question, I calculate the present value of all costs that would be incurred to maintain the level of public service that existed in 2000 into the far future if no new housing units were occupied in 2000 or on any date thereafter. I then calculate the present value of those costs if new housing units were occupied in 2000 at the historical rate, along with accompanying commercial, industrial and retail development, but no additional development was put in place after 2000. I also calculate the portion of the present value of tax payments that will be made by that incremental development, assuming that the share of costs financed by property taxes and per capita debt are held constant. If the incremental development pays more in taxes than the extra public costs it generates, then new development is a fiscal boon to existing development.

I implement these calculations at the state and local levels, where the local level includes the Manatee government, the Manatee School District and all municipal governments and other government entities in Manatee. The results of these calculations are included in the accompanying table.

At the local level, I estimate that new housing unit in Manatee County first occupied in 2000, together with all associated commercial, retail, and industrial development, would have paid $13,343 more in taxes, in present value terms, than the costs it created if no new development had occurred after 2000, even with no impact fees. I also estimate that a new housing unit in Manatee County, first occupied in 2000, together with all associated commercial, retail and industrial development, would have paid $1,439 more in taxes to the state of Florida, in present value terms, than the state costs it created if no new development had occurred after 2000. Therefore, impact fees are not required to ensure that new development pays its share of public costs in Manatee County.

If local governments in Manatee County need additional revenues to pay for infrastructure needs, diverting general fund revenues, issuing bonds or instituting additional broad-based taxes dedicated to infrastructure projects all would provide greater equity between existing development and new development than the use of impact fees.

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Because Florida still has a lot of relatively affordable land, there is no reason to expect rapid population growth to end any time in the near future. This growth means that communities in Florida must continually invest in public infrastructure to prevent the level of public services enjoyed by their residents from declining. It also means that Florida's state and local tax base is continually expanding due to new development.

Increasing demands for government services in recent years have spurred Florida's state and local governments to search for new revenue sources. Impact fees are one such potential source of revenue. If new development places a fiscal burden on existing residents - that is, if the tax revenues that flow from new development are not sufficient to cover increased costs - implementing impact fees is an efficient and equitable way to cover the difference. Equitable, because it remedies the excess fiscal burden placed on existing development by new development; efficient because it brings the private costs incurred by those undertaking new development more in line with the full social costs of new development, which include the private cost borne by parties to the development process and also external costs borne by third parties, such as excess burdens placed on existing taxpayers. Economists argue in favor of policies that bring private costs in line with social costs because such policies ensure a more efficient allocation of society's scarce resources. If, however, new development is a fiscal boon to existing residents, instituting impact fees will cause a further inequitable shift of wealth from the owners of undeveloped property to the owners of previously developed property, and a less efficient allocation of resources by discouraging development that has a social value in excess of its social cost.

Local governments may be tempted to view impact fees simply as a tool for revenue generation. Economists, however, view impact fees as a way to ensure that the marginal costs of new development reflect the full social costs of that development and that existing residents are not impoverished by new development - that new development pays its share of public costs. The Home Builders Association of Manatee County and the Gulf Coast Builders Exchange commissioned this report to determine what impact fees, if any, are needed to ensure that new development pays its share of public costs in Manatee.

I develop a formula to evaluate the need for impact fees based upon a comprehensive and rigorous, yet straightforward and comprehensible economic analysis. First, I calculate the present value of future costs associated with maintaining the current level of public service into the future, supposing there were no future development in Manatee. Second, I calculate the present value of future costs associated with maintaining the current level of service if there were one additional year of development but no development thereafter, and also the share of these costs that will be borne by the new development and by the old development. If the costs borne by existing development are higher with an additional year of development, impact fees are needed to ensure new development pays its share of public costs. If, however, the costs borne by existing development are lower with an additional year of development, impact fees are not needed.

While impact fees have become a popular tool for financing new infrastructure, the methodology typically used to calculate the need for impact fees does not derive from a rigorous economic analysis of the impact of new development. Rather, the typical impact fee study simply adds up the cost of new infrastructure that will be put in place to accommodate new development, subtracts a few small credits determined on an ad hoc basis and allocates remaining expenses to new development as impact fees. Our analysis differs from such studies in five major respects. These are:

1) Typical impact fee studies use current cost estimates of infrastructure needed per new housing unit to prevent level of service from declining. However, existing infrastructure has been subject to significant wear and tear. New development will pay an equal share in the repair, reconstruction or replacement of that infrastructure. Also, new residents will derive a level of service more or less equal to the community average, which is derived from the amount and quality of infrastructure actually in place. It is not appropriate to charge new infrastructure 100% of the current cost of needed infrastructure and then immediately ask them to start chipping in to replace older infrastructure. The national average unit of existing infrastructure's value is only 43% of to its replacement cost. We estimate that a new housing unit in Manatee in 2001 generated the need for $11,895 of state infrastructure and $23,735 of combined county, municipal and school district infrastructure to meet concurrency requirements.

2) New residents pay taxes where they live, where they work, and where they shop. Therefore, we evaluate new development on a community wide basis, comparing costs and revenues where new residents will live, work, and shop, rather than on an ad hoc, piecemeal basis.

3) We estimate that the typical housing unit in Manatee County in 2000 was subject to an obligation of $1,829 of state debt and $2,846 of local debt. Since new development will pay an equal share of this debt, new development should be credited accordingly.

4) New development generates significant public revenues before new residents actually move in, thus before county and municipal governments begin to incur operating expenses associated with new residents. For instance, developers pay property taxes on model homes, sales taxes on the materials used in construction and documentary stamp taxes on deeds and mortgages. I estimate $9,236 of sales tax revenue to the state and $930 to Manatee County and $2,296 of documentary stamp tax revenue to the state.

5) Development put in place today will pay more than an equal share of ongoing property tax revenue over its lifetime, in present value terms. This is because new construction is larger and more luxurious and has not been subject to depreciation, thus a given structure put in place today carries more than an equal share of the tax burden. My analysis accounts for this fact.

Altogether, I find that the typical housing unit in Manatee County first occupied in 2000 would have enriched existing residents by $14,792, with no impact fees whatsoever, if no development occurred thereafter. Since development occupied in 2001 would also pay more than its share of public costs, some of which will benefit development occupied in 2000, development occupied in 2000 will not pay fully $14,792 more than its share of costs. However, since each incremental year of development would contribute more than its share absent additional development, the aggregate impact of development occupied in and after 2000 must be to ease the financial burden placed on development already in place before 2000. The conclusion of this analysis is therefore that impact fees are not needed to ensure that new development pays its share of public costs in Manatee County.

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Impact fees have become a popular way to raise revenue to fund infrastructure needs. If new development does not generate enough public revenues to cover associated public costs, economists advocate impact fees as a way to ensure that the private and social marginal costs of development are aligned. If, however, the public revenues associated with new development exceed public costs, impact fees drive a further wedge between the public revenues and costs associated with new development, inappropriately distorting development decisions and enriching existing development at the expense of new development.

I constructed a comprehensive but simple analysis of the fiscal impact of new development in Manatee County. I found tax revenues from additional development more than covered associated state and local government costs without any impact fee revenue whatsoever. Therefore impact fees are not warranted on the grounds that new development places fiscal burdens on existing development - it does not.

My analysis differs from typical impact fee studies in five ways. First, new residents should not pay the full price of new infrastructure when they move into a community in which the average unit of infrastructure has experienced significant wear and tear, and which new residents will help pay to repair and replace. Second, new residents pay taxes where they live, where they work, and where they shop; so new development should be evaluated on a community-wide basis. Third, new residents should receive credit for assuming a full share of debt obligations that were incurred to pay for past infrastructure investment. Fourth, new residents should receive credit for tax revenues that result from the process of development and are paid before the new resident actually takes up residence, and these revenues should be estimated in a comprehensive way, rather than the arbitrary, ad hoc, techniques usually employed. Fifth, new development will make up more than an equal per parcel share of the property tax roll and will therefore pay more than an equal share of future property taxes, in present value terms. The arguments in favor of these differences should be clear to anyone who carefully considers them.

While I find that new development in Manatee County generates more than enough revenue to pay all associated public costs in present value terms, this is not to say that the public revenues sufficient to fund all new capital projects will magically appear in funds dedicated to infrastructure needs. Indeed, the revenues collected from new development will accrue to general revenue funds and may not occur across levels of government proportional to costs. However, in aggregate, the revenues are there and will reduce tax burdens on existing residents. It is a political matter whether such revenues will be devoted to infrastructure needs. If they are not, it does not negate the fact that they were contributed by new development.

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