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Reform of Local Public Finance in Virginia – Examining Impact Fees

An ‘impact fee’, or as I prefer to call it, a ‘community services tax’, is conceptually easy to understand, but difficult to calculate and quantify. Simply put, the community services tax identifies the unfunded marginal cost of community services attributable to new residential real estate development. This amount is assessed when a building permit is issued and paid when the property is sold. Thus a portion of the private gain from new real estate development is captured to defray the cost of at least a portion of the unfunded public costs associated with that development. Since the entire community presumably benefits from, for example, new schools, it would not be fair to assign the full cost of new community services to new residential development. But it is imminently fair to assign something to new development.

I think it is true that the cost of new community services associated with new development is locality specific and that tools exist to make that calculation. I do not have access to such tools; however, I take as a starting point the recent proposal of the Home Builders Association of Virginia (‘HBAV’) for an ‘impact fee.’ In its last, but not enacted, version HBAV proposed an ‘Impact Fee’ of $12,500 in Northern Virginia and $7,500 elsewhere in the state.


Although entitled an ‘Impact Fee’, the HBAV proposal is actually an alternative method to distribute the revenues garnered under the existing Northern Virginia ‘Proffer’ system over a larger number of dwellings by including ‘by right’ development. I was unable to find any evidence that the proposal included any calculation of the marginal cost of additional community services due to new development. According to news accounts:
Loudoun typically receives a proffer of $47,000 for each new house under the       current system, and Prince William receives more than $30,000. Even at those   levels, county officials say, they struggle to build enough schools, libraries and   parks for the added residents. (Washington Post, February 8, 2008, p. B1)

As a self-interested trade association, it is reasonable to assume that HBAV’s proposal is in fact lower than the marginal public cost of new residential development. Also I find it hard to believe that Loudoun and Prince William Counties are trying to impose the marginal costs of all new units on units resulting from zoning changes only, and ignoring by right development.

For these reasons I suggest a community services tax of $25,000 per unit. This is obviously subject to revision, but I strongly suspect it is low. In implementing the community services tax, the General Assembly should consider a ‘low’ amount (say $15,000) which a locality could enact without any supporting research. Anything above this threshold would have to be justified by a recognized methodology. This would recognize that smaller localities may not have the resources to undertake a full blown study of their local costs.

Finally, although I consider the HBAV proposed ‘Impact Fee’ amount to be very low, it is nonetheless a startling admission. Consider: a trade association of home builders is admitting that, state wide, their industry is imposing a cost to the public of $7,500 for each home they build!

Whether the unfunded per unit public cost of development is $7,500 or $25,000, if there is a deficiency it must be made up by an increase in local real estate taxes. This is simply unfair to all property owners, and over time it leads to loss of open space. Moreover, as we have seen, at the very time when demand for local services increases due to development, the Composite Index (‘CI’) reduces state educational funding. Virginia’s system of local public finance is virtually guaranteed to accelerate development and loss of open space.

As local real estate taxes increase to meet demands of new development, existing property owners understandably object and express their objection at local elections. This can lead to further under-funding of local services. A case can be made that the transportation congestion in Northern Virginia and elsewhere is the result of thirty years or more of perverse local government finance.

In the case of the CI, perversity arises from the blind application of the ‘revenue capacity’ of real estate. This amplifies the lack of local funding for service expansion due to development. In addition, the revenue capacity basis of the CI fails to account for the special circumstances of densely populated urban areas. The reforms suggested in this series address both deficiencies.

Readers interested in the details of my proposal, including the adjusted CI for each locality, can obtain a copy of the full memo by request of the author at his email address.

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