So, Hernando County has decided to eliminate impact fees for a year:

Hernando County Commission suspends all impact fees for a year

Faced with an economy that is showing no signs of a quick recovery — and a building and business community looking for help — the Hernando County Commission voted unanimously Tuesday to suspend all impact fees for a year.

Commissioners had been planning to talk about a further reduction in the fees, which already had been lowered from $9,200 to $4,862 two years ago for single-family homes. Then Commissioner Wayne Dukes suggested the suspension, turning the discussion in a different direction.

[. . .]

Mark Alexander of Alexander Homes likened the suspension to the use of a defibrillator to restart someone’s heart.

“We need that defibrillator,” Alexander said.

“All this is an effort to try to make an atmosphere where people will invest,” said business leader Len Tria.

But the idea wasn’t universally embraced.

“Gentlemen, you are about to make the biggest political mistake of your lifetime by approving a reduction or elimination of impact fees,” said resident Anthony Palmieri. “How can you explain that after you raised the millage rates to balance the budget you are giving away funds for needed infrastructure at the request of a special interest group.”

First, some explanation.  Impact fees are charged to new development (homes and businesses) to pay for the costs of providing infrastructure.  They are for capacity-building projects only, not for maintenance or operating costs.  So, impact fees can be used to build another lane on a roadway or to expand an intersection or to build a new school, library, or park, but can’t be used to pay staff or for repairs or (and here’s the interesting one for those of you savvy readers that are saying “yeah, yeah, we know all this, already”) to pay for existing deficiencies.  That is, if a roadway is already failing, impact fees can only be used for additional capacity that is above and beyond the existing deficiency.  (Maybe we’ll blog later on this interesting tidbit.)

Now, let’s deconstruct this a little bit:  Most Florida counties and municipalities charge some type of impact fee, though several have suspended their fees temporarily, and most are not trivial amounts of money.  Duncan and Associates does an annual survey of impact fees at impactfee.com if you are interested.  The Florida average impact fee for a Single Family Dwelling (SFD) in 2010 was $10,277.  So, Hernando’s $4862 was already low compared to the average, but it was in line with  its neighbors (well, two of the three, at least:  Citrus = $4460, Sumter = $2997, Pasco = $21,119).  The Hernando BOCC would have been justified in keeping the fee where it was, but obviously felt that the fee was doing more harm than good and decided to suspend it entirely.

So, I think we have a couple questions here to answer:

1.  Does suspending impact fees work?  More generally, how do new home starts react to changes in impact fees?

I analyzed building permit data from Citrus County after the Citrus BOCC suspended transportation impact fees in 2009 or so.  While there were effects of the change–a bump in the number of permitted SFDs in the month or two after the impact fee decrease–the long-term trend was unaffected–increased permitting associated with the change was offset by lower than expected permits in the month or two before the decrease and permits back to trend after a few months.  In fact, when using 5-month moving averages, there was no impact whatsoever on new SFDs.  I looked back at the impact fee rise in 2007 in Citrus and found that the opposite had happened in the short-run and still no impact on the long-term trend.  To make matters worse, multivariate statistical analysis of all impact fee changes and permitting numbers left impact fee changes with the wrong sign:  increasing fees were associated with more permits in the ensuing months and decreasing fees were associated with fewer.  Obviously, that can’t be causative, so something else is driving home building and it isn’t impact fees.

Thus, what a local government does with impact fees is probably not going to have much effect at all on the home building industry.  And it doesn’t require a complicated statistical analysis to tell you why.  The typical new house costs somewhere on the order of $200 to $300,000 in this area of the world.  An impact fee of $5000 represents only 2.5% to 1.25% of that cost.  And a new home is a pretty inelastic product–meaning that buyers are not very sensitive to price changes; not many people who would buy a house for $250,000 are going to change their mind when the price rises to $255,000.  Of course, I understand completely why home builders oppose impact fees:  the product is not completely price inelastic, so the incidence of the tax falls in part on them, even if they can recoup the majority of it via a higher selling price.

2.  Will eliminating impact fees have a big impact on county revenues?  Is this really the biggest political mistake of anyone’s life?

Unlikely.  The fact of the matter is that home building is dead right now in this area.  Outside of The Villages, counties are seeing SFD permits around 150-250 per year.  That’s not even close to the replacement rate for houses, let alone new growth.  So, if there’s no new net growth, what are you going to spend impact fee dollars on?  (I question whether you legally can spend them on anything, actually, if there’s no net growth.)  I might agree that ending impact fees for all time would be a political mistake (unless you’re going to replace them with mobility fees or some other more efficient tax), but all the Hernando BOCC did was suspend them, so they will return in a year when everyone realizes that the suspension had no impact whatsoever.

In fact, politically, it may have been a wise move:  let the fees be dropped when you aren’t collecting any and then you can say “See, impact fees aren’t the problem here.”  That’s how it went in Citrus.

3.  Are SFD impact fees the problem, anyway?

We at Achievable Solutions have been puzzled by the focus on residential impact fees.  That’s not the problem and never has been!  The problem is impact fees on business.  Far more than families, businesses are driven by the bottom line, and therefore their demand for new buildings is far more elastic.  People say “WalMart is the richest company in the world, they can afford to pay the impact fee.”  Yes, that’s true, but completely immaterial.  They won’t pay it if it doesn’t make business sense.  Businesses already pay a disproportionate share of property taxes and an even more disproportionate share when you factor in their demand for services.  Adding an impact fee on top is perverse:  businesses over time are net fiscal positives for local government; residences over time are net fiscal negatives.  So, having high commercial impact fees drives away exactly the people that pay high property taxes and ask for very little in return.

In sum, I’d say that Commissioner Wayne Dukes had it right:  there’s very little that a county government can do to create jobs, but this is something they can try.  It may be the typical logical fallacy of government:  A.  We need to do something; B.  This is something; therefore, C. We need to do this.  But at least it won’t do any harm, even if it’s unlikely to do any good.

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