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When is a Fee a Tax?

Updated: Sep 15, 2020

I know I’m preaching to the choir a bit here, but sometimes the choir likes some attention too. We have all been in public hearings regarding changes to development impact fees (DIFs) and heard some developer claim, Its a tax, it walks like a duck and quacks like a duck. Well, you know the rest. Well, it’s true! For the existing public, an impact fee becomes a tax when the DIF isn’t adopted and maintained.

Many California cities are now struggling with the issue of DIFs. The BIA is orchestrating a statewide campaign to have these important fees reduced or eliminated, with successes in some agencies. Now, if you calculated your DIFs according to California State Law (Gov’t Code 66000 et. seq.), the fees are limited to an amount that merely accommodates new development. So it follows that if you do not impose and collect the DIFs, by definition, you are not accommodating new development. But clearly new development creates increased demands for (among others): public safety services, circulation system travel space and storm drainage/utilities capacity. So, the capital needs still exist, but at whose expense? Thus, uncollected DIFs become an unrecognized or delayed tax, and they take the form of longer commutes, longer police/fire responses, and more crowded public facilities. They also take the form of taxes diverted from general benefit to the benefit of the purchasers in the development and will ultimately be paid with future taxes. Or in the current climate, it will simply not ever get constructed and the resulting infrastructure problem will just become a part of the fabric of the community.

I recently got to sit in on a meeting with the staff of a client city and four developers. I thought I was invited to defend that City’s DIFs. What I saw was a City defense of DIFs in general. They simply get it. Their City Council’s policy is that new development must pay its own way, period, and that they will accommodate, but not subsidize development. Development does not define them, but it could break them. They are paying more attention to the operational needs of the existing community and less to the developers asking for subsidies to enhance a profit. They have rejected the argument that development for the sake of development is somehow a good or necessary thing. Oh, they did review their DIFs to see where actual reductions to project costs (mostly to land acquisition) have occurred and will act on those.

So, what should you do? It’s probably best to ask yourself, do you need to subsidize development and is there any substantive benefit to the existing community from it? Let’s assume a suspension of DIFs and roll on through the three major land-uses.

RESIDENTIAL – I have not yet heard the plausible explanation of how the approval of twenty residential dwellings without any DIFs imposed improves the economy of your community. It may merely increase your currently high vacancy rate and will be a drag on your current General Fund taxes. You may wish to check with the many homeowners with homes for sale now on how they would feel about that.

COMMERCIAL It is one the highest demand land-uses and you no doubt have many existing struggling businesses and current vacancies there also. However, if it is in an urban area already containing the hard infrastructure, it may be beneficial.

INDUSTRIAL/MANUFACTURING Okay, such a subsidy may make some sense, especially if it’s a new business that creates jobs that increase the average wage in the community (check your U.S. census). But if it reduces the average wage, why would you wish to subsidize that?

And that’s the point. You need to have a policy and consider that large gray area in the middle of that continuum. Avoid the knee-jerk reaction of assuming that the DIFs are somehow a bonus revenue. They are real, they are important and they represent what your community will be in the future. If there is a real desire to reduce the DIFs to stimulate building, have those reductions sunset at a certain date. When it comes time for your elected body to have this DIF discussion (and perhaps you can control that point), be prepared with a cognizant and logical policy that makes sense for your community. It ought to meet some sort of group objective other than the fairly vague partner with the construction industry to get the economy going. That will happen when the number of vacant residential and business structures decreases. Count on it.

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