Development Impact Fees for Minnesota? A Review of Principles and National Practices


John Adams, Julie Cidell, Laura Hansen, Hyun-joo Jung, Yeon-taek Ryu, Barbara VanDrasek

October 1999

Report no. CTS 99-04

Over the last two decades, local governments throughout the country have been looking for additional sources of revenue. Cuts in federal and state intergovernmental revenues, historically high interest rates, changes in tax-exempt bond markets, and voter resistance to increased taxes have forced governments to increase their reliance on fees and user charges. Local governments face a dilemma of escalating demands for public facilities and services caused by new development without having sufficient revenues to finance these demands. Existing residents are resistant to higher taxes and fees to fund the services and improvements required by new residents. In addition to problems of growth, many communities are struggling to finance backlog needs to bring aging or nonexistent systems of infrastructure up to modern standards. As a consequence of these problems, there is considerable interest in impact fees, which are charges to developers for off-site infrastructure improvements made necessary by the new development. Impact fees are viewed as a way for growth to "pay its way." In light of the economic pressures on local governments, it is clear why they have turned to impact fees. For growing jurisdictions, impact fees represent a vast store of potential revenue that can be tapped at less political cost than other sources. This practice does not mean, however, that impact fees are always the best solution or the wisest solution for infrastructure finance when taking account of social equity considerations and the need to maintain long-term community support for capital spending programs. Impact fees pose several considerations simultaneously: legal, economic, technical, administrative, policy, and financing alternatives. When faced with a proposed future fee scheme, builders, business people, property owners, and future home buyers should study all sides of the issue at once, not just the legal or economic questions. Impact fees raise fundamental social questions such as: Who really pays? How is the fee calculated? Where does the money go? How and where is the money spent? Who really benefits from the new or expanded public facilities? What is the impact of the fees on housing costs for new and for existing residents?

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