Can Legislators Tame California’s Infamously High Impact Fees? – Pacific Research Institute

Can Legislators Tame California’s Infamously High Impact Fees?

If you haven’t been living under a rock, you know that California is currently in the grips of a worsening housing affordability crisis. I take that back—if you’re living under a rock, you’re probably acutely aware of this fact.

Before the pandemic, over half of all California renters spent more than a third of their income on rent, while one in three spent more than half of their income on rent. The situation with owner-occupied housing wasn’t much better, with the Golden State posting the second-highest home prices in the nation. The pandemic has only deepened this crisis, with prices going up by over 17 percent between March 2020 and 2021. Is it any surprise that working- and middle-class families are leaving the state?

At the root of the California housing crisis are the many barriers that state and local governments have thrown up to block new construction where it’s needed most. If you can build a home at all in California, regulation is bound to make it much more expensive. Thankfully, a raft of bills in the state legislature aim to remove or—at the very least, lessen the sting of—many of these regulatory barriers.

In a recent piece for the Orange County Register, I highlighted AB 1401, which would block cities from imposing onerous parking requirements near transit. In a forthcoming piece, I’ll look at SB 10, which would exempt efforts to allow more housing near transit from unnecessary CEQA hurdles. This week, let’s look at AB 602, which aims to tame the state’s infamously high development impact fees.

Like in many states, local governments in California often levy impact fees as a condition for allowing new development. In theory, impact fees make a lot of sense: if a new development is going to require upgrades to public services, such as more school seats or a street redesign, the developer—or more accurately, the future occupant—should have to cover these costs. Who can argue with that?

The trouble is that, in practice, California’s impact fees have spiraled out of control and are now a major driver of housing costs in the state. According to one 2015 study, impact fees in the Golden State are now three times the national average. A subsequent 2018 study by researchers at UC Berkeley’s Terner Center found that impact fees raised the cost of a new single-family home by anywhere from $21,000 to $157,000—that’s six to 18 percent of the price of a new home.

Worse yet, these fees are often unpredictable, bearing little relationship to the actual impacts a new project might have. While local governments are legally required to conduct a nexus study establishing rough proportionality between the exactions being imposed and the impact of the development, these standards are loose, and there’s ultimately little preventing local governments from charging whatever they like. In practice, many simply use impact fees as another way to tax Californians.

As written, AB 602 aims to streamline impact fees, adding a dose of consistency and transparency to the process. Under the proposed legislation, local governments would be required to follow baseline standards for calculating public service needs and project impacts. To help this process along, the bill tasks the California Department of Housing and Community Development with developing an impact fee nexus study template that local governments can use to get the numbers right.

The bill would also change how impact fees are assessed in subtle, but important, ways. At present, impact fees are usually assessed on a per-unit basis—more units mean higher impact fees. But this gets the incentives precisely backward, encouraging developers to build fewer, more expensive units. AB 602 would nudge local governments to levy impact fees on a square footage basis, charging developments based on their size, rather than the number of units.

To see how these reforms might work, imagine a vacant 50,000 square foot lot in Fresno. Under the current regime, a developer has two options: she could either develop this lot into ten 2,000 square-foot homes and pay around $1.5 million in impact fees, or five 4,000 square-foot homes and pay only $750,000 in impact fees. As we can see, the current framework oddly punishes the developer for building the smaller, more affordable homes that California needs.

Under AB 602, both developments would likely pay the same impact fee, as the total floor area—20,000 square feet—would be the same. And under a revised methodology, these fees would likely be much lower, with Fresno being held to strict standards in calculating the impacts of the proposal, and subject to tighter transparency requirements. No more backroom dealing; no more extorting new development.

This isn’t the first time the state has tried to tackle impact fees. As recently as 2020, state legislators tried–and failed—to offer needed impact fee exemptions for income-restricted housing and set a cap on impact fees. So the passage of AB 602 can hardly be taken for granted. But so far, signs are encouraging: the bill enjoyed unanimous, bipartisan support in the Assembly and is now off to the Senate.

As promising as impact fee reform may be, no single reform is going to undo a half-century of housing underproduction and overregulation in California. But with housing shortages mounting, prices skyrocketing, and families leaving the state in droves, even a small step in the right is a step well taken.

Nolan Gray is a professional city planner and a housing researcher at UCLA. 

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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