March 29, 2006

RALEIGH – The Raleigh City Council wants to raise impact fees on construction by 72 percent. But the city’s consultants failed to account for positive impacts of new construction, a new John Locke Foundation Spotlight shows.

Cities charge “impact fees” on new residential construction to pay for the increased costs of growth on city services. But as JLF researchers Dr. Michael Sanera and Guillermo Peña argue, the rationale behind impact fees focuses only on the negative impact of growth and ignores the obvious other half of the equation: growth’s benefits.

“New homes lead to higher property-tax revenues,” Sanera, JLF research director and local government analyst, said. “Converting old farmland with low property values to a subdivision with lots of new homes raises property values exponentially. Land that used to produce low property-tax revenues for the city now yields relatively high property-tax revenues.”

The impact-fee report commissioned by the City of Raleigh ignores those benefits, Sanera and Peña argue. The report prepared by Duncan & Associates neglects to consider Raleigh’s increased tax revenues from new home construction and ownership.

“What Raleigh needed was a comprehensive economic analysis of growth,” Sanera said. “What Raleigh paid for was an unbalanced, one-sided look at the impact of growth. How can you gauge something’s real impact if you don’t examine its benefits along with its cost?”

As Sanera and Peña point out, the Duncan & Associates report is in line with reports the city used in 1987 in establishing its impact fees. Those reports ignored growth-driven revenue increases, too. Originally set at $667 for every new home built in Raleigh, the impact fee was raised by the city council in 1995 to $682. The Duncan & Associates report notes that it could be increased to as much as $3,404.

“It isn’t too much to ask that a city council obtain a comprehensive impact-fee study,” Sanera said. He cited as an example research published last year by Professor Michael Walden, the William Neal Reynolds Distinguished Professor of Economics at N.C. State University in Raleigh.

“Professor Walden calculated the total economic impact of building 100 new single-family homes and 100 multi-family housing units in the Triangle,” Sanera said. “He used a more comprehensive measure of public costs than Duncan & Associates. Along with roads and open-space costs used by the City of Raleigh, Walden included costs related to schools, police and fire protection, solid-waste disposal, and water and sewer services. But he also calculated their impact on tax-revenue sources: property taxes, local sales taxes, utility excise taxes, inspection and permit fees, and motor vehicle taxes.”

Although Walden’s research looked at the effect of growth on Triangle cities and counties, Sanera and Peña say his comprehensive methodology is something Raleigh should use in deciding whether an impact fee is justified. By taking growth’s economic benefits into account, even while using a more complete assessment of growth’s costs on the community, Walden found that local revenues outpaced public costs by nearly $77,000 per year over a ten-year period. He also found that the new home construction led to $64.7 million in new economic activity and almost 600 new jobs.

“By looking at both sides of the issue, Walden discovered that growth more than paid for itself,” Sanera said. “This is just common sense. Everyone knows it’s good for a community to grow.”

Dr. Michael Sanera and Guillermo Peña’s Spotlight report, “Raleigh’s Flawed Impact Fee: Incomplete Research Means Proposal Is Broken from the Start,” is at the Locke Foundation’s web site. For more information, please contact Dr. Sanera at 919-828-3876 or [email protected]. To arrange an interview, contact JLF communications director Mitch Kokai at (919) 306-8736 or [email protected].