Impact fee policy needs clarity


If anything useful can be said to have come out of the House Bill 2 controversy, it would be a broader understanding of how limited the powers of local governments are in our state.

Before the dispute, many North Carolinians seem to think that the relationship between Raleigh and localities is and ought to be comparable to the relationship between Washington and the states. Now they know differently. While the federal constitution recognizes a clear distinction between the enumerated powers of the central government and the powers reserved to the preexisting states or the people themselves, there is no such provision in the state constitution. North Carolina localities are created by the state and exercise only the powers delegated to them by the state.

Local governments are answerable to local constituencies, of course. And it makes sense for state policymakers to give localities significant control over their budgets, personnel, and other decisions. But the state has a constitutional obligation to protect the fundamental rights of North Carolinians from being trampled on by local governments, and to balance local preferences with a legitimate interest in statewide coherence and predictability when it comes to taxation, permitting, and other regulatory matters.

For example, it’s time for the General Assembly to intervene in the longstanding dispute about impact fees in North Carolina.

Impact fees are an alternative way of paying for water and sewer service, schools, and other local services. Rather than taxing or charging everyone in the jurisdiction, the locality levies a fee on the construction of new homes. It is argued that such a fee makes growth “pay for itself,” because new construction creates new demands for services.

It is also argued that impact fees make “developers” rather than the general public shoulder the cost, but this is mainly a rhetorical device for bamboozling voters rather than a serious claim. Most of the time, impact fees are passed along to the buyers of new homes, rather than eaten by developers as lower profits. There’s a good deal of empirical research supporting this observation, both in America and around the world.

Is it reasonable to impose a surcharge on buyers of new homes? In many cases, I would submit, the answer is clearly no. Using impact fees to fund schools, for instance, is obviously unreasonable. Purchasing a new home doesn’t create any more demand for schools, or signify more benefit from the existence of public schools, than purchasing an older home does. What actually affects enrollment is whether households have school-aged children. It would be more rational, though unpopular and unwise, to charge residents school impact fees according to the number of children they have, rather than according to the age of their residences.

When it comes to infrastructure such as water and sewer, a recent decision by the North Carolina Supreme Court has revealed the state’s laws to be a complete mess. Countywide utilities have explicit authority to charge fees not just for the immediate use of water and sewer but also to expand capacity to meet future service demands. However, the law granting financing authority to municipalities has no such language, as the town of Carthage has discovered to its regret after years of charging impact fees on new developments for water and sewer. Carthage will have to refund hundreds of thousands of dollars of such fees, and other municipalities are now scrambling to figure out their own exposure under the Supreme Court’s decision.

Two groups of state lawmakers are taking action in response. House Speaker Pro Tem Sarah Stevens has filed House Bill 436, which would essentially get rid of impact fees, including those legally authorized for specific municipalities by past local acts of the General Assembly. Another group, led by freshman Sen. Paul Newton, is working on legislation to standardize but not prohibit the use of impact fees across the state.

Ambiguity can sometimes be helpful in resolving disputes. But when it comes to charging North Carolinians for government services, what we need is clarity.

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.

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