Government's fiscal woes could hit property taxes, fees

State and local government fiscal woes are creating more pressure to raise local property taxes and impact fees, according to participants in a legislative update panel at the Urban Land Institute's annual fall meeting in San Francisco.

Panelists concurred that impact fees are "becoming a catch-all for local agencies to establish a revenue stream" to offset shrinking budgets, according to a Nov. 12 news release. The fees are a popular target because they are not perceived as a tax and can be buried in the cost of housing. For instance, impact fees in California can reach $30,000 a unit, adding to the state's severe housing affordability problems.

"In the next 12 to 18 months, if the market cools, (government officials) may be looking for additional ways to go after real estate," said Ellen B. Marshall, vice president of Patuxent Consulting Group Inc., in Washington, D.C. "Any downturn or upshift at the federal level takes six to eight months to have an effect at the state level, and another six to eight months in lag time at the local level."

Marshall said that sales taxes and taxes on alcohol and cigarettes have probably reached their limit, which means that states and localities will have to find other sources of revenue. She listed five factors that need to be watched closely because of the potential impact on real estate: property taxes; impact fees; taxation of services; economic development incentives; and the federal preemption of the tax base.

The greatest impact of new taxes and fees will be incurred by new development, the panelists said. A case in point: while rental housing income has steadily declined since 2001, real estate taxes, impact fees, water and sewer fees and application fees have all risen, making it more difficult to build affordable housing.

For example, New Jersey has increased its real estate transfer fees by 50 percent; Prince George's County, Md., has a $5,000 to $12,000 per unit school fee. "Anytime there is a downturn, they are looking for fees," Marshall said.

"Impact fees are higher now than they have ever been," said Nicholas Pappas, president of K. Hovnanian Companies of California in Irvine. "One of the difficulties associated with the way impact fees are levied is on a per-home basis. A million-dollar luxury home will have the same fee as a $250,000 entry-level condo. The inequity in that needs to be eliminated. Higher-density, low-cost housing is now unfairly burdened."

Jeffrey DeBoer, president and chief executive officer of The Real Estate Roundtable in Washington, D.C., said that to highlight the detrimental effect of raising fees and property taxes, industry professionals should focus on effectively framing the message and building coalitions to deliver it.

"Words matter. Impact fee' doesn't illustrate anything," DeBoer said, pointing out that jobs and revenue are a way to show the effect of such fees in a meaningful way. "(This is) highly important because it affects affordability. We have to bring about some reform or we will find ourselves in another downturn."

The Urban Land Institute is a nonprofit education and research institute supported by its members. Its mission is to provide responsible leadership in the use of land in order to enhance the total environment