Regulation for Revenue: The Political Economy of Land Use Exactions.

THE PROLONGED REAL-ESTATE SLUMP of the early 1990s has quashed most of the local controversies about growth that raged in various regions of the nation in the '80s. But the growth controversy promises to revive soon, as increasing population, the business cycle, and pent-up demand for new development combine to restart rapid growth.

The disputes about growth involve the issues of property rights, taxation, and government planning for public works such as transportation and water. But the growth issue opens a window on some of the larger and more ominous ailments of modern political economy, the nature of which is hinted at in the main title of Alan Altschuler and Jose Gomez-Ibanez's recent study, Regulation for Revenue: The Political Economy of Land Use Exactions.

The phrase "regulation for revenue" refers to the recent but now widespread practice of imposing large "impact" fees, special assessments, and exactions on new residential and commercial real-estate development. Only about 10 percent of American localities imposed exactions before 1960, the authors note, while by the mid-'80s about 90 percent did. Regulation for Revenue is the most thorough survey to date of the surprisingly limited amount of economic literature that has been produced on this subject. And although the authors do not set out to be partisans on one side or another, they clearly recognize that crafting regulatory systems explicitly to produce revenue, as opposed to a traditional "compelling state interest" such as health and safety, represents "a dramatic power shift...from the owners of property to government officials."

The other notable feature of this book is its recognition that "relevant market signals are almost entirely absent" from most aspects of urban planning today. The discussion of the virtue of road pricing and other market-based policies shows how ideas once confined to the pages of REASON have become part of the mainstream discussion.

THE USE OF IMPACT FEES AND EXACTIONS--as high as $40,000 for a single family home and $30 per square foot for commercial development in California--soared in the '80s, ostensibly as a way to get around anti-tax sentiment and voter-imposed tax limits such as California's Proposition 13 or Massachusetts's Proposition 2 1/2. The chief justification for hefty increases in development fees is the contention that "growth doesn't pay for itself" through the incremental value added to the tax base. Altschuler and Gomez-Ibanez summarize the few studies that have been done on this question, which show that whether growth pays for itself is far from clear.

Rather than getting drawn into the methodological ambiguities of this issue, it is more useful to concede the premise that growth doesn't pay for itself, because it leads to the land-use equivalent of the old saw about wife beating: Just when and how did growth stop paying for itself? After all, we managed to build schools and roads and sewers and water systems a generation ago without huge development impact fees, and with lower tax rates, too. The hypothesis to test is that perhaps growth never did pay for itself directly, but was "subsidized" from general tax revenue to a much greater extent than is true today.

A little sleuthing about fiscal trends in the context of urban growth brings into sharp relief the massive shift in public resources away from growth-related public works and toward the redistributive social programs of the welfare state. The point is: It is not the nature of growth that has changed but the nature of government fiscal policy. If state and local governments devoted the same proportion of their budgets to growth-related public works as they did 30 years ago, new development would have little trouble "paying for itself."

It is not simply the inertia of welfare-state social spending programs that keeps this fiscal irresponsibility from being recognized and redressed. As a value-free social-science inquiry, Regulation for Revenue doesn't get into these issues very deeply. But the authors can't help but recognize some of the profound temptations that this new environment presents. For goo-goo ("good government") types, impact fees have the obvious attraction of being even more thoroughly hidden than their first cousin, the value-added tax. "They do not show up on anyone's tax bill," Altshuler and Gomez-Ibanez write, "and while they are likely to drive up developer prices they remain imperceptible even to purchasers as a distinct cost item." Together with the enhanced regulatory regime to which impact fees are ineluctably linked, this new way of governing development has led to huge new opportunities at the local government level for socialist-minded reformers and has contributed to the bureaucratization of local government across the country.

LOCAL PLANNING DECISIONS USED TO be fairly straightforward matters, handled by small city planning departments and overseen by part-time city councils. Now most growing cities--even small ones--have large planning departments and de-facto full-time city councils (even if still nominally part-time) dominated by the activist-type politician described in Alan Ehrenhalt's The United States of Ambition. Local anti-growth sentiment provides the political base for ambitious goo-goos to build what are essentially local ministries of economic planning.

The new "regulation for revenue" is starting to go well beyond simply paying for growth-related public works such as roads and sewers. The latest wave in this game is to impose "linkage" fees for "social infrastructure needs" such as child care, mass transit, and affordable housing. In this perverse version of "market failure," new commercial development is said to create an unfilled "need" for transit, housing, child care, and so forth. San Francisco, for example, imposes a mass transit fee of up to $5.00 a square foot on commercial development to help pay the massive tab for BART (Bay Area Rapid Transit) and other red-ink transit projects. Other cities have successfully imposed fees for child care and affordable housing. Such fees have withstood court challenge, under an extremely elastic understanding of the "nexus" principle outlined in the famous Nollan case.

The "nexus" principle holds that there must be a reasonable and direct relation between a development and the service the government provides for that development. A new home will result in the need for a road and a sewer line, for example. But arguing that a new office building results in a need for publicly supplied mass transit or child care is like saying that a new restaurant should have to pay an impact fee to buy land for farmers to grow the food. It goes without saying that the lack of affordable housing in most jurisdictions that want to impose affordable housing fees is the result not of "market failure" but of local government regulations preventing the marketplace from providing lower-priced housing. (A sequel to the Nollan case, Dolan v. City of Tigard, was recently heard by the U.S. Supreme Court. But even if the Court finds in favor of the property owner in this case, it is unlikely to trim the "nexus" principle very much.)

This de facto economic planning and resource allocation is the most ominous aspect of regulation for revenue, and there has been very little serious study and commentary on the issue. If local governments continue to get away with this kind of "social need" fee, the trend could point the way for states and even the federal government to get in on the act, especially in an era of tight budgets. Can a "crime impact fee" for prisons be far away in the age of "three strikes and you're out"? After all, a house attracts burglars, and shopping malls attract thieves.

The "collapse of socialism" and the supposed triumph of free markets have become cliche in recent discourse. The regulation-for-revenue trend is yet another piece of evidence that these rumors are premature, that both illiteracy about market economics and the urge for socialism persist in many mutant forms.

Contributing Editor Steven Hayward is research and editorial director for the Pacific Research Institute in San Francisco.