Development impact fees

By: J. David Chapman/December 15, 2016

Local government financing is a difficult issue for local politicians and city managers. They are challenged to meet the needs of constituents while balancing the budget of their city, county, school district and other agencies.

While raising property taxes is an option, in Oklahoma cities don’t actually get portions of property taxes and are mainly dependent upon sales taxes to meet budgetary requirements. Property tax increases also prompt aggressive opposition from homeowners and business owners and are increasingly negotiated away as economic incentives.

To help pay for necessary growth, some cities are turning to impact fees on new development to defray some consequential growth from those developments. An impact fee is a one-time charge imposed on new construction, such as housing developments, office complexes and retail centers designed to offset the financial impact the project will have on local infrastructure.

Oklahoma City recently voted to impose new impact fees on residential and commercial developers building in the city limits starting Jan. 1. Proceeds from the fees will help pay for streets, trails and parks needed to meet the demands of growth. The fees are administered according to zones.

Theoretically, those developing in areas with existing infrastructure would be charged less than those developing in areas without needed streets, sewer, water, parks and trails. This should motivate developers to build on in-fill lots in areas with lower impact fees and sufficient city infrastructure. Likewise, it should discourage developers from building on the fringe areas of the city that lack that infrastructure, thus lessening the negative impact of urban sprawl. Sounds good, right? Well, not so fast.

One unintended consequence of these impact fees could be a real advantage to the surrounding suburb cities of Edmond, Bethany, Moore, Midwest City and Yukon. Oklahoma City leaders may have believed that surrounding cities would jump on the impact fee bandwagon, but so far, none have done so, and there is no evidence of consideration.

The impact fees imposed on Oklahoma City development could cause developers looking at development on the fringes to go a little farther and simply develop in those suburbs. If this happens, there could be a corresponding loss of retail sales in Oklahoma City and a reduction in sales tax. If neighboring suburb economic development organizations are watching, this could be a nice tool in the ever increasing economic development arms race tool bag.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).