A strategy to combat urban sprawl and fund local services (Guest Post: Greg Burge and Trey Trosper)

Greg Burge is an Associate Professor and Trey Trosper is a Ph.D. candidate in the Department of Economics at the University of Oklahoma. Both are members of the Scholars Strategy Network. This blog post is based on a paper they co-authored with Arthur Nelson, James C. Nicholas and Julian C. Juergensmeyer.

Urban sprawl has worried community officials, urban planners, and concerned citizens for the past several decades.  Residents in sprawling cities commonly deal with worse pollution, longer commutes, poorer health, and higher costs of providing public services than those who live in more compact areas.  While these effects may be exacerbated by larger urban populations, cities of even moderate size can feel the effects of urban sprawl.  For example a report attempting to measure urban sprawl found that in 2000, Oklahoma City and Tulsa were both more sprawled than the Los Angeles-Long Beach metropolitan area.

What should city officials facing sprawl do?  Most efforts to curb urban sprawl generate unintended painful consequences.  One standard approach has been to adopt ‘urban containment’ strategies.  Such policies include greenbelts, growth boundaries or ‘no-growth zones’, construction permit caps, and even construction moratoria.  However, academic research has shown these policies can cause inefficient economic outcomes.

A second method for handling urban sprawl may come from the revenue side; namely, development impact fees. Impact fees are one-time fees levied on new construction.  By law, they can only be used to improve or expand infrastructure in the areas in which the fees were collected.  Fee amounts are designed based on the expenditures required to create additional capacity in local infrastructure to meet growth demand.  While impact fees are used to supplement other local revenues and provide needed public infrastructure, they may also have a secondary benefit with regard to urban sprawl.

One of the drivers of urban sprawl is the current landscape of local fiscal policy that creates a “system of subsidization”.  Take for example, the construction of a new road serving development at the urban fringe.  All citizens of the city generally end up paying higher property and/or sales taxes.  Those in the inner core receive little to no benefits, but still pay higher taxes.  In essence, development at the urban fringe is subsidized by those living in the rest of the city.

Our recent study analyzed how impact fees could influence urban sprawl, examining a unique program from Albuquerque that was initiated in 2005.  The program calculated impact fees based on expected future infrastructure costs.  This led to certain areas facing much lower fees than others.  For example, the core areas that already had large amounts of built-up infrastructure were expected to need less expenditures to accommodate future growth.  However, the urban fringe had much lower levels of service provision, such that impact fees were set at higher levels (roughly five times the core levels).

Ultimately, we found evidence that the impact fee program did, in fact, have a significant effect on the location of new residential construction.  For each dollar of increase in impact fees, the effect on building permit rates was twice as large in the fringe areas of the city versus the urban fringe.  Given the larger fees levied at the urban fringe, the effect we found translated into a 10:1 impact on construction rates.

Should cities without impact fee programs adopt them?  Perhaps, but such a choice should be made carefully.  Since research has shown that impact fees may result in lower overall construction rates, they may not make sense for cities losing population or that are very small and trying to reach the size where economies of scale in public service provision are more attainable.  For higher-growth areas, using impact fees instead of other financing tools may bring important benefits.  Cities with excessive growth can use impact fees to mitigate urban sprawl and to effectively provide needed public revenues.

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