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Abstract
Although in recent years many jurisdictions have begun using impact fees to finance infrastructure costs associated with commercial development, few studies have examined how fee-financing compares to other forms of financing. My analysis finds impact-fee financing to be both efficient and welfare enhancing. Using a circular city model, I find that the fees act as a Pigouvian tax that is welfare enhancing for a single jurisdiction as well as for its neighbors. While still welfare enhancing, differing policies between jurisdictions is not efficient and leads to divergence from each jurisdiction's efficient market size. Heterogeneity, restricted household mobility, and costly voting could explain the sporadic pattern of impact fee use observed at the jurisdiction level. This leads me to conclude that regional implementation of impact fees is preferred to individual community policies, a finding consistent with the inefficiency of tax competition.Many jurisdictions are also considering other alternative forms of revenue such as gas taxes and sales taxes. Modeling these taxes in the circular city model shows them to be less efficient than using impact fees to fund infrastructure required to support commercial development. The main reason gas taxes and sales taxes are less efficient than impact fees is that they do not force firms to consider social costs when making market-entry decisions.Furthermore, existing research on impact fees assumes that fee revenues are spent on additional infrastructure but this may not be the case. Empirically, there are differences in the revenue elasticity of expenditure across categories of expenditure type. Fee revenues earmarked for capital expenditures that require large operating costs are more likely to crowd out other revenues than fee revenues in categories that do not require as much future expense.