Impact Fees vs. DevelopmentMore Cities Offer Incentives to Spur Development
By:Rachel Z. Azoff

An increasing number of cities are reducing or suspending impact fees; implementing tax rollbacks; and offering additional incentives in a desperate attempt to stimulate development activity.

The rollback of impact fees—which municipalities often require developers to pay in order to cover the costs of expanded infrastructure and public services—is the most common tool used by cities to spur development. Cities are open to the idea because they have little to lose: Few new building permits means they aren’t receiving much money from developers in the first place.

“This summer, there has been a lot of activity, notably in Georgia, Florida, and California,” says Thais Austin, infrastructure and public finance specialist for the Washington, D.C.-based National Association of Home Builders. “Once one community starts cutting impact fees, it’s easier to make the case. After one city has done it and the world hasn’t fallen apart, the level of comfort increases.”

Most recently, at the end of July, Loveland, Colo.’s city council voted to roll back the city’s capital expansion fees for developers of multifamily housing and duplexes by about 25 percent.

Certain expansion fees were not reduced, while nine others were lowered by 61 percent. The net effect is to reduce the fees on a multifamily unit from about $23,000 to about $17,000, according to the city council.

But Ed McMahon, a senior resident fellow at the Washington, D.C.-based Urban Land Institute, doesn’t think reduced impact fees will translate into increased development activity. “I don’t think these rollbacks will produce much new development. The reason development is not taking place has little, if anything, to do with development impact fees,” McMahon says. “It has to do with the marketplace; it has to do with the lack of financing.”

Five cities that have implemented impact fee rollbacks so far this year.

Fremont, Calif. Lowered impact fees by 75% in an effort to attract more residential construction and business to the area

Bradenton, Fla. Approved the suspension of impact fees for one year; impact fee collections for parks have declined by 75% since the housing downturn began in 2007

Naperville, Ill. Approved a one-year moratorium on road impact fees in response to an initiative by the Naperville Development Partnership, which is working to recruit commercial businesses in the city

Bonita Springs, Fla. Approved a rollback for road impact fees along the main commercial area of the city; businesses that can access the rollback must occupy at least 1,000 square feet of space

Cabot, Ark. Unanimously approved the elimination of impact fees as a method to stimulate the home building industry; alternative financing mechanisms are being considered for the construction of the new fire station

Source: National Association of Home Builders

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Home Buyer Tax Credits Needed To Jump Start Housing And The Economy

February 28, 2008 - With the housing industry facing its greatest crisis since the Great Depression and the economy teetering near recession, the National Association of Home Builders (NAHB) today called on Congress to move quickly to enact a second round of economic stimulus directed squarely at the housing sector. Specifically, NAHB believes the best policy is to create a tax credit for the purchase of a home.

“The biggest bang for the buck most likely would be provided by a temporary home buyer tax credit,” NAHB Chief Economist David Seiders told the Senate Finance Committee. “Tax credits for the purchase of a home are a means of eliminating excess inventory, relieving some of the pressure on falling housing prices and ending the waiting-on-the-sideline strategy some potential buyers have adopted in response to overly negative media stories concerning the future of the housing market.

”The recently enacted Economic Stimulus Act of 2008 could fall short of achieving its intended results because it does not address the problems posed by the housing contraction that are at the root of today’s economic and financial market problems, he said. “The U.S. housing market now is in the contraction phase of the most pronounced housing cycle since the Great Depression,” said Seiders.

“Single-family housing starts are already down by 60 percent from their peak at the beginning of 2006 and the bottom is not yet in sight. Congress can, and should, do more.” There are many models that Congress can look to when designing home buyer tax credits. The District of Columbia, for example, offers a $5,000 tax credit to first-time home buyers for the purchase of a new or existing home.

A national first-time home buyer tax credit would stimulate buyer demand for households who do not have a home to sell, who are waiting on the sidelines until prices stabilize and who now face greater housing affordability than a year ago. Furthermore, those who sell their existing home to a first-time home buyer will in turn purchase another home and spur additional economic activity.

A similar version of a home buyer tax credit was used successfully in the mid-1970s when Congress established a temporary tax credit for the purchase of a newly-constructed home to help clear off a then-record number of unsold homes on the market. NAHB applauds the efforts of several senators who are seeking similar solutions.

For example, Sen. Debbie Stabenow (D-Mich.) has introduced S. 1988, legislation that provides for a temporary, one-time refundable tax credit for first-time home buyers of 10 percent of the purchase price of a principal residence. Additionally, Sen. Johnny Isakson (R-Ga.) introduced S. 2566, a bill creating a one-time $15,000 tax credit for purchasers of a single-family principal residence that is a newly constructed home or a home in default or foreclosure purchased within a one-year time period.

“What is common among these tax credits for the purchase of a home is that they represent policies that increase housing demand, thereby enabling home purchases for families and fight falling housing prices, which threatens the economy as a whole,” said Seiders.

“We recommend a targeted home buyer tax incentive in order to maximize induced purchases.”

Seiders also urged the Senate Finance Committee to consider the following changes to tax policy in order to get housing moving again:

- Expand the mortgage revenue bond program to be used for either home purchases or refinancing of existing mortgages to help strapped borrowers. This would be especially helpful for communities experiencing the possibility of a wave of foreclosures or an extreme excess of inventory, he said.

- Allow businesses to carry back net operating losses for five years. For home builders large and small, the importance of the ability to claim and carry back net operating losses deductions to years when significant taxes were paid cannot be overstated, said Seiders. “The inability to do so will result in the need to either increase high-cost borrowing or further liquidate land and homes, which will only compound the existing inventory problem.” Expanding the carryback of net operating losses to five years would help the home building sector, as well as all businesses, to weather the economic downturn.

- Designate housing as an eligible investment for tax-preferred retirement accounts. A downpayment remains the single largest hurdle for most first-time home buyers. Congress could increase capital available for a downpayment for the purchase of a home by allowing a downpayment to qualify as an eligible investment from tax-favored retirement accounts. This would enable buyers to use IRAs or 401(k) accounts to purchase a home without suffering tax penalties.