The city of

Atlanta's impact fee ordinance is a prime example of why ideas that are

good in theory often crumble when faced with the treacherous seas of politics

and the real world.

The concept

driving the impact fee is simple and surprisingly noncontroversial. New

growth requires new infrastructure and public services, such as roads,

water, sewer and sidewalks. Rather than having existing residents and

businesses pay for these up-front capital costs, new residents and businesses

can be assessed a onetime fee to cover them. About 20 counties and cities

in Georgia levy impact fees [including Peachtree City, Fayetteville and

Tyrone, and, for fire purposes, Fayette County].

The problems

emerge when this concept is translated into practice. For one, what constitutes

a "public service" is like an industrial-sized rubber band it

can be expanded to include almost anything. One study identified more

than 22 different categories of "public services" that have

been financed by impact fees, including public art, community centers,

land for city hall and low-income housing.

On the surface,

Georgia's impact fee laws are not quite so charitable. At their core,

however, one finds a great deal of latitude in that the laws give local

governments wide discretion over what parts of their jurisdictions and

which projects the fees may cover. As a result of this generous law, Atlanta

designated its entire city as a district for the purpose of distributing

transportation fees and decreed that projects as wide ranging as sidewalks,

traffic signals and road interchanges can qualify. Consequently, impact

fees in Atlanta can be used to finance improvements located nowhere near

the actual project.

Atlanta estimates

that it collects $3 million to $4 million per year to help finance transportation,

park land and public safety services such as police and fire. The vast

majority of this money is generated primarily in north Atlanta, and Buckhead

in particular. A substantial portion of this money appears to be siphoned

away from areas directly affected by the new development and is instead

spent in crosstown neighborhoods in south and west Atlanta.

This practice,

however, violates the principles of and philosophy behind impact fees.

Impact fees should be used to pay the cost of new facilities built to

accommodate growth, not to correct deficiencies in existing services or

pay for the ongoing operations of programs located well away from the

impacted area.

In fact, funding

projects, programs and services that new development in a particular area

does not impact seems to run contrary to the intent of the law.

Despite the

creativity of Atlanta and other local governments, state law stipulates

that impact fees must be used to cover "that portion of the cost

of system improvements which is reasonably related to the service demands

and needs of the project." In other words, the fees must go to paying

for the public services affected by the project, not to subsidize services

in areas the project does not directly impact.

local governments to assess impact fees for broadly defined services and

in broad geographic areas, Georgia law also encourages cities to levy

fees higher than they should be. After assessing policies in eight suburban

cities near Chicago, for example, a study for the Heartland Institute

concluded that impact fees create an opportunity for local government

to "charge developers more than the real cost of development simply

to increase the municipality's treasury."

Is there a

way out of this fiscal morass? Yes, if Georgia's elected officials are

willing to think creatively.

If the goal

is to ensure that new growth pays for itself, then local officials in

Atlanta and elsewhere should consider changing the way they "price"

public services, particularly utilities such as water and sewer. Local

governments frequently fail to factor in capital costs, such as debt service

and investments in new equipment, thereby unwittingly offering a subsidy

to development.

their services the same way private utilities price cable, telephone and

electricity services, these subsidies can be eliminated. As long as developers

are paying the full cost of development, the less precise policy of using

impact fees can be avoided.

In addition,

many services could be provided privately, or at least financed by the

new development through private contractors. This approach would certainly

be appropriate for, among other things, sidewalks and parks.

The federal

lawsuit recently filed by the Greater Atlanta Homebuilders Association

and National Association of Industrial and Office Properties contends

that the city is using the fees as simply another way to tax local businesses

and residents.

The city of

Atlanta, on the other hand, argues that the impact fees are necessary

to finance basic infrastructure to keep the city livable and competitive.

History and

experience suggest the real estate community is correct on this issue.

Local officials should strongly consider abandoning the impact fee concept

as currently practiced or dramatically realigning it to conform to its

basic principles.

[Sam Staley

directs the Urban Futures Program for Reason Public Policy Institute,

a think tank based in Los Angeles, and is a senior fellow with

the Georgia Public Policy Foundation, an independent think tank based

in Atlanta. A similar article by Staley was previously published in the

Atlanta Journal. © 2002 Georgia Public Policy Foundation.]