Academic journal article Atlantic Economic Journal

Fees and Firms: An Empirical Examination of the Relationship between Development Impact Fees and Firms

Academic journal article Atlantic Economic Journal

Fees and Firms: An Empirical Examination of the Relationship between Development Impact Fees and Firms

Article excerpt

Introduction

Since the tax revolt of the late '70s and early '80s local governments have been searching for and implementing revenue alternatives to the traditional property tax. One such alternative is a system of development impact fees. Impact fees started their ascent in popularity in the late 1970s and have become especially popular in the South and the West. According to a survey by Duncan Associates, over half the states have adopted impact fee enabling legislation and many more jurisdictions use fees through home-rule authority even though the state has not set up specific enabling legislation (Mullen 2012). Yet, while impact fees have become popular, their effect on business activity and firm location is still an area of active research vital to local policy makers.

Development impact fees are levied on both residential and commercial development. While the literature examining fees' effect on residential development is maturing, the literature on the relationship between fees and commercial development is still in its infancy. Theoretical models of impact fees find them to be an efficient way to pay for infrastructure. Brueckner (1997) uses a linear city model, with an infinitely dense employment center located at one end of the line and progressively less dense residential development along the length of the line, and finds fees to be an efficient way to pay for infrastructure required by residential development when compared to cost sharing methods. Jones and Snow's theoretical work (2015) compliments Brueckner's by using a circular city model to analyze whether a residential property tax system, fee system, or a cost sharing system, is the efficient way to pay for commercial development's infrastructure requirements. By maximizing a utilitarian welfare function they find a fee only system to be welfare maximizing, a result consistent with Jones' (2013) finding that fees are superior to mileage or sales tax funding of infrastructure to support commercial development.

Empirical research on impact fees and employment has yielded mixed results. The first examination by Nelson and Moody (2003) uses pooled cross sectional data on employment and a constructed fee size variable. The nature of the data and the method for constructing the "fees per building permit" variable used to determine the relationship between fees and job creation requires that their estimates be interpreted as correlation, not causation. Their result is consistent with Jeong's (2006) finding that rapid growth is a significant factor in a jurisdiction's decision to adopt fees. Jeong and Feiock (2006) reach a similar conclusion as Nelson and Moody using a longer lag and a binary variable for county fee usage. However, Burge and Ihlanfeldt (2009) use more detailed panel data, including statutory fee levels, to find that an increase in fees results in less job growth after a short lag than for jurisdictions that either do not use fees or leave their fees unchanged. Their result suggests that fees have a negative impact on employment levels. Economic Development Quarterly (unpublished) finds that the effect of fees varies between industries with a more negative effect on employment within industries that can easily avoid the fee by locating in other jurisdictions. The work presented in this paper empirically compliments a secondary theoretical result in Jones and Snow that the equilibrium number of firms in a jurisdiction using fees is less than the equilibrium in a jurisdiction without fees and is consistent with the reduced employment levels of Burge and Ihlanfeldt.

Model

One way to conceptualize impact fees is as a fixed cost. It is easy to imagine fees in a similar vein to construction costs paid up front in cash or financed over time such as any other fixed cost. Extending Bresnahan and Reiss' (1991) model of firm entry to include fees as an additional fixed cost provides a structure to analyze the relationship between fees and the number of firms. …

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