Abstract: Paper No. 176
The Incidence of Development Fees and Special Assessments
Development fees and special assessments are popular ways to finance new infrastructure. This paper provides the first formal treatment of the incidence of these financing mechanisms. The standard view that development fees are a way to shift the burden of new public infrastructure onto the new residents that require it shown to be only partially correct. The buyers of new homes bear some of the burden of these fees as the benefits of infrastructure show up in the prices they pay for housing. Even with mobile households, competitive housing markets, and infrastructure investments that meet a benefit-cost test, however, one-quarter or more of the burden of these fees could fall on the owners of undeveloped land. Moreover, any attempt to impose fees for infrastructure that does not benefit new residents will only increase the burden landowners bear. Development fees also confer a small capital gain on existing homeowners and, to the extent that housing construction is competitive, do not place any burden on developers. No wonder development fees are so popular! Special assessments appear to be a fairer financing mechanism. Under the same assumptions listed above, the burden of special assessments falls entirely on the people who benefit, namely the people who buy new housing. Thus, with well functioning markets and sensible decisions about infrastructure investment, special assessments avoid the problems of unfair burdens on landowners and unfair gains to existing homeowners.
The revised version of this paper was published in the National Tax Journal, March 1998, pp. 23-42. Those interested in this work should see that journal.