Daily Archives: January 16, 2017

Parcel Taxes are Better Than Impact Fees

A short note on housing development impact fees. These fees are popular with California cities for a variety of civic improvements, like parks and affordable housing. They owe their popularity to two facts: one, thanks to Prop 13, cities have the ability to levy them more easily than property or sales taxes, and two, the public sees the tax as falling on Big Bad Developers™ and on people who don’t even live in the city yet.

Unfortunately, because they fall on such a small portion of the city’s land and on such a small number of housing units, impact fees are a poor way to fund civic improvements, and have undesirable externalities. On the first count, the fees will never generate very much money relative to the city’s budget and needs. On the second count, because the fees will be set relatively high compared to the value of the housing in an attempt to at least get some improvements out of them, they will drive up the cost of housing. In the case of affordable housing impact fees, the resulting increase in rents makes impact fees somewhat self-defeating as method of achieving the goal.
The unavoidable problem of impact fees is that unless we are developing a large greenfield master plan housing subdivision in a new suburb, they inevitably place a heavy burden on a small portion of the housing and land.

Consider trying to build 10,000 affordable housing units in LA County – a small number relative to the total number of housing units in the county, which is over 3.5 million. Even when development in the county was occurring at a relatively quick pace in the 1980s, at 75,000 new units per year, the cost per unit would be huge. At an affordable unit cost of $300,000, each of the 75,000 new units would be saddled an impact fee of $40,000; at 4% for 30 years, this is higher mortgage costs of about $200/month. There’s simply no way this fee can be assessed without depressing new housing construction.

On the other hand, if the fee is assessed on all 3.5 million housing units in LA County, the assessment will be about $850 per unit, or about $4/month for 30 years. This will have practically no impact on the cost of housing. Thus, it may even be possible to increase the affordable goal.

Lastly, consider a tax on assessed value, also known as a property tax. The current assessed value of LA County is roughly $1.264 trillion dollars. The tax to fund the affordable units would be about $1 per $100,000 of assessed value, reducing the burden on each unit even further.

Simply put, if we have worthwhile community goals, we should fund them in a way that’s fair and that works. Parcel and property taxes are not as popular, but they are much better, and we should fight to do things that way when we can.