What Is an Impact Fee?

Impact fees are fees imposed on property developers by municipalities for new infrastructure that must be built or increased due to new property development. These fees are designed to offset the impact of additional development and residents on the municipality's infrastructure and services, which include the city's water and sewer network, police and fire protection services, schools, and libraries.

These fees can also be levied against an individual or entity where its actions create an externality within a municipality. They are one-time charges for the creation of new infrastructure.

Key Takeaways

  • An impact fee is typically a one-time payment, issued by a local government on a property developer.
  • The fee is meant to offset the financial and usage impact of the new development on the area's public infrastructure.
  • The public infrastructure is meant to include roads, schools, parks, recreational facilities, and wastewater facilities, among others.
  • The impact fee is determined based on the size of the new development, the cost of implementing it, and how much it will impact the surrounding area.

How an Impact Fee Works

Impact fees grew in popularity when taxpayers resisted a rise in property taxes to help fund the creation of new infrastructure. New infrastructure is sometimes paid through a special assessment tax, which passes the cost of new infrastructure and projects onto taxpayers within a designated district.

However, for people who already own property in an area seeing a lot of development, an impact fee paid by the developer is preferable. This is because the developer must then cover the cost of the new infrastructure necessitated by their development, rather than the individuals already living there.

Impact fees can sometimes be seen as disincentives to developers since an impact fee can significantly raise the cost of a large construction project for the developer. Many people believe that this can also result in a loss of potential jobs in an area. However, research has shown that impact fees are significantly more efficient at raising revenue for infrastructure than the traditional method of collecting revenue through property taxes, which often fails to provide sufficient funding for municipal needs.

Impact fees also create a larger bank of land that can be developed. This is because impact fees take into account the cost of development and creating new infrastructure. A city may be densely populated and growing, but without the financing to build more homes and infrastructure, growth is limited. An impact fee allows a developer to pay for the cost of growth, which can help the city expand.

Examples of Impact Fees

Impact fees may be created by states or smaller municipalities. In the city of Oakland, California, impact fees exist on the creation of new construction. In one zone of Oakland, the impact fee for the construction of a new single-unit dwelling through 2019 was $28,000. Of this, $23,000 went to a fund for affordable housing, $1,000 went to a fund for transportation and the other fees went to fund capital improvements.

Other municipalities throughout California use similar fee structures to support civic infrastructure and stabilize the housing market. California is home to some of the highest and most extensive impact fees in the U.S.