Use of impact fees grows in Chicago suburbs, increasing cost of new and existing homes

“Hidden tax” paid by consumers, not developers, University of Chicago study reports

CHICAGO -- Suburban Chicago communities are turning more frequently to impact fees to pay for new infrastructure, imposing a “hidden tax” that drives up the cost of new homes and existing homes alike, a new University of Chicago study reports.

Sometimes viewed by local government officials as a politically safe way to raise revenue by imposing taxes on new development rather than on current voters, impact fees also have unintended economic and social consequences. For example, in driving up the cost of housing, impact fees may price minorities and less affluent families out of the market, the study reports.

The newly released study was conducted by University of Chicago economist Don Coursey, who was commissioned by the Illinois Association of REALTORS to update a study he conducted in 1999 on the affects of impact fees on suburban Chicago municipalities.

Impact fees are charges assessed by counties and municipalities to recover part of the cost of infrastructure improvements that they believe future tax revenues will not cover. Impact fees are an increasingly common tool that local governments use to help pay for new schools, roads, sewer systems, parks and other public amenities.

“These new results imply that the use and magnitude of impact fees has significantly increased over the past decade. The findings also echo the findings from the original study: municipal officials and the public ought to pay even keener attention to the unintended social and economic consequences created by the use of impact fees,” the report says.

The study was based on six suburban Chicago communities that use impact fees, chosen randomly: Huntley, Lindenhurst, Naperville, Plainfield, Poplar Grove and Sugar Grove. A seventh northern Illinois community that does not use impact fees, Machesney Park, was used as a control community in the analysis.

Among key findings of the study:

• For the six representative suburban communities studied, an average $10,000 impact fee was assessed on the average new home price of $391,000 (housing market period 2002-2004). But the fees are magnified in final sales prices: the total effect on new homes increased their cost by $27,000, or 7 percent.

• Impact fees also affect the cost of existing homes, which are sometimes a substitute in the marketplace for new housing. The price of an average 25-year-old home ($292,000) rose by $7,200 or 2.5 percent because of the fees.

• Impact fees represent one of the fastest-growing taxes on consumers who wish to live in suburban communities.

• The use and magnitude of impact fees has significantly increased over the past decade.

• Although impact fees are imposed on developers, they are passed along to homebuyers.

• The fees may encourage developers to produce more expensive homes, thus pricing lower-income buyers out of the market. And they may also place a disproportionate burden on poor and middle-income homebuyers, as the fees represent a higher percentage of the sale cost of a lower-priced home than a higher-priced home.

• Impact fees can have a significant impact on housing development policy, including:

o Subsidization of existing households at the expense of new entrants to the housing market

o Possible exclusionary practices toward minorities and the poor

o Concerns about equity when it comes to determining who pays for and benefits from roads, schools and parks and other local amenities.

The Illinois Association of REALTORS said that while it does not oppose the use of impact fees per se, it believes they frequently are higher than they need to be to cover the incremental costs of infrastructure improvements linked to new development. In that case, the “fee” quickly evolves into a “tax.”

The Association urges that local government officials, state legislators, policymakers, the media and others pay closer attention to how impact fees are used.

“There are a multitude of reasons to pay close attention to this vital issue,” said Gary Clayton, chief executive officer of the Illinois Association of REALTORS.

“Impact fees are not wholly borne by developers, but are passed along to consumers. They increase the cost of new and existing homes in communities where they are imposed. They can raise serious issues of fairness and equity. For these reasons, local government officials and the public should pay careful attention to the unintended economic and social consequences created by their use,” said Clayton.

A summary of the study is available on the IAR Web site at www.illinoisrealtor.org/iar/newsreleases/impactstudyhighlights.html. 

The Illinois Association of REALTORS (IAR) is a voluntary trade association whose 60,000 members are engaged in all facets of the real estate industry. In addition to serving the professional needs of its members, the IAR works to protect the rights of private property owners in the state by recommending and promoting legislation that safeguards and advances the interest of real property ownership.

Don L. Coursey is an economist and Ameritech Professor of Public Policy Studies in the University of Chicago’s Harris School of Public Policy and at the College. He served as dean of the Harris School from 1996 to 1998. He received a B.A. in mathematics and a Ph.D. in economics from the University of Arizona and has previously taught at the University of Wyoming and Washington University in St. Louis. He has received the Burlington-Northern Foundation Award for Distinguished Achievement in Teaching; Greater St. Louis Award for Excellence in University Teaching and John M. Olin School of Business Teacher of the Year Award in 1989 and 1990. 

-30-