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CIAO DATE: 5/5/2007
Taxing Development: The Law and Economics of Traffic Impact Fees
Edward P. Stringham
December 2006
Abstract
Should developers be charged fees for negatively impacting residents? New development often uses existing (or requires new) infrastructure including roads, sewers, refuse collection, parks, fire, police, and schools. When developers provide this infrastructure to users for “free,” who should pay? Over the past fifty years governments have increasingly charged new development impact fees for imposing costs on communities.1 California is one of the leaders in the development of impact fees.2 The modern Pigovian idea is that government can set a fee at the value of the impact to internalize externalities and encourage the economically efficient amount of development.3 While developers can often provide the necessary infrastructure within their own developments as part of the construction process, additional impacts from new development may spill over into existing communities that necessitate additional capital improvements.4 Local government can hypothetically charge the development a fee that is equal to this impact, thereby internalizing this externality. If the exact value of the external impact is known and implemented as a fee, this process can encourage the economically efficient amount of development. Despite the increasing popularity of development impact fees, several issues make the government’s “economically efficient” solution easier said than done.
This paper focuses on traffic impact fees and illustrates a series of difficulties with their use. Contemporary U.S. law suggests that fees be based on a rational nexus of costs and benefits and on rough proportionality of a fee with the external cost imposed by new development. But how are these external costs measured? Can government know the marginal impacts of all homes before they are built? Do all developments have the same marginal impact on infrastructure, and, if not, should they all be charged different fees? Unless government knows the exact marginal impact of each development, they will undercharge some and overcharge others, making “economically efficient’ development impossible. In the absence of markets with actual prices for these common pool resources, government will face numerous calculation problems.
