Is the Systems Development Fee, a common fee imposed during the construction process, a good example of a true "user" fee or is it simply another misdirected tax? by Gene DeNardo
(libertarian)
Thursday, July 30, 2009
Systems Development Fees are fairly common in the United States. Usually levied by a public building department when a construction permit is applied for, their intent is to contribute towards the cost of public infrastructure development that is a result of private sector construction. People that live in houses and work in buildings use the services, such as sewers, roads and schools, that are provided by public works and the SDF is supposedly a method to "charge" the "users" for these services. Do these fees do what they are intended to do?
Our first consideration would be who actually pays the fee? This is not necessarily whose pocket it first comes out of, but who in the end covers the cost of the fee? If it is a successful user fee, then it must be paid by those who "use" the services specified. And, once this is determined, does the money actually pay for those services or is it diverted? Finally, is the "cost" indicative of the actual cost of the service?
In almost all cases it is the builder of the project who is charged for the Systems Development Fee. Whoever applies for the building permit is assessed a fee determined by the public agency. Fees vary from region to region, but for the most part are in the "thousands" of dollars. They are meant to reflect the existing cost and future maintenance of roads, sewers, water, drainage, power, schools and other public or quasi public services that if not paid for by the user will be funded by the taxpayer. Due to the fact that these "services" are installed prior to the building over and extended period of time, it is impossible to determine this cost with any degree of accuracy.
The theory is that the builder will simply add this cost to his price and the client, who ultimately is the user of the services, will pay the fee and the resultant cost. Does the builder have the ability to pass on this cost?
For the builder to "pass on" the fee cost, he must be able to "raise" the price of the project or home at will. However, the most the builder can charge is the absolute maximum the client can pay. He can charge less than this amount, but he can not charge less than his costs for any extended period of time without running into financial difficulties.
Because of these "market" circumstances, the Systems Development Fee can at times be drawn from the builders return, taxing the builder's input of labor, etc., to pay for infrastructure. It also applies constraints upon the builder's ability to adjust to a market in which demand is falling and meet the client's lessening ability to pay. And, it can also weaken a builder's ability to compete and survive within the market, since he has less profit to adjust to best his competitor's price; so in that sense it adds to price stickiness, as most direct government intervention does.
So, it cannot be said that the fee is always borne by the client or user, as fee or no fee, the client is only capable of meeting a certain price point. It is also true that the fee can deprive the client of some benefit of falling prices or builder competitiveness. So, in particular instances, falling prices and/or competitive labor markets, the user client will pay some of the fee cost. Other times, the primary portion of the fee will be paid by the builder.
Because the builder is not the end user, it really is not important whether the fee is applied to the cost of its stated services; the fee is already a failure. Instead of a user fee, it is a form of income tax for the construction industry.
Public officials often argue that no matter what, it is the builder that is benefiting from the "value" of these government services, so even if the fee is not perfect, this value should be taken back from the builder and redirected to the public agencies. The problem with this line of thought is that there is absolutely no value of these services "capitalized" in the building or project. Any value that the building captures is totally created by the natural resources and the builder's labor. Infrastructure improvement around the building do not add to the structure's value or utility, although it certainly can be said that water pipes in a building have little value without water.
That might seem like a strange and crazy statement, after all, where would the sewage go if not for municipal waste pipes and treatment? How would we get to and from the house if not for public roads, etc.?
All the things provided by government agencies definitely add value, but it is not to the building. The value is capitalized in the land. It is the land that grows in value with each service added. It is the potential that the bare land provides for subsequent development that stores the value added by government services.
Roads are often the first government "improvement" added to bare land. Roads are most basically an "easement" or ability to access the property. Without access, the property has little value or no value. Access greatly increases the value of any property; the better the access, usually the higher the price. Access also brings the property closer to other government services.
The creation of new subdivisions is the perfect stage for the privatization of roads. The entire road system of a new subdivision could be built and owned privately, cutting down greatly the subsidized and socialized cost of the neighborhood. The new community could also "control" access to the neighborhood as they wish, since they would "own" the roads. This is not being taken advantage of on any large scale.
Public power is often brought in next. This adds geometrically to the value of the bare land. The options, regrettably, for private power are still very limited, due in no small part to the socialization of the cost of centralized power production in our nation.
Public sewer lines are then extended. This improvement permits the prospective builder to "save" money by not having to install an alternative private system such as a septic system. The savings of cost and time is incorporated into the land value. The catch 22 of this is that public agencies make it extremely difficult, in the name of public "safety", to install an alternative system, both increasing private costs and raising land values that have access to sewer services. In this way, they use their monopoly powers to further public expansion of services, justifying tax increases.
Public water service directly follows or precedes sewer installation. The value added here again is the "savings" of time and money that would be required to drill a well. Risk is also socialized as all wells don't produce and all don't supply good water. A side benefit to industry from public water supply is more leniencies in pollution of the water table. The fewer private wells there are in a developed area, the fewer individuals to affect when harmful chemicals are leached into the ground water. The chances of lawsuit decline.
This public supply of subsidized water also encourages overuse and abuse of the water supply. Las Vegas is a running example of this situation. A region that naturally has zero water uses close to two hundred gallons per person per day. You can view "water shows" that occur on the hour or ride in a gondola in one of the driest climates on earth. Although it does add a nice "glistening" effect to the pampered skin of all the Lindsey Lohan wannabees, it does little to achieve a market cost for water or encourage conservation. And it further grows government by calling for creation of government agencies to fight the same water abuse that other government agencies encourage.
Once these basic or "necessary" services are brought in, often many of the "utility" services are added. Each one, such as phone or cable, adds to the value of the bare land. They bring convenience and expanded possibilities to the possible future "private" improvement, whether it will be home, business or industry. All these "utilities" are provided by subsidized monopolies that work in cooperation or downright collusion with public agencies. It would be implausible to argue that any are a result of the "free market".
And, we can't forget the value we all add to bare land. The more prosperous the community is, the more value added. The ability to find gainful employment, nice restaurants and convenient shopping raise the demand and price of land. People value what others do around them and will pay for it. It is the land that absorbs this value not the buildings. Lots are cheap in the Mohave Desert, not so in San Francisco.
This phenomenon is made evident in any analyses of land values. The cost of building construction varies from place to place, but it is dependent on the local cost of labor [and fees] and the local cost of materials. If you could transplant the same materials and labor to a different region, the housing costs would be fundamentally the same. It is the land value that varies greatly according to the "improvements", both government and private, that occur around the land and the regional land scarcity.
There are many more examples of "advanced" public improvements that bolster land values. Public schools allow families access to "free" education for their children. Public colleges lead to higher wages and higher income levels in the area, further increasing land values. Parks and recreational centers all add to "public" enjoyment of pleasures that can be "purchased" in private developments. Add enough "supplemental" public services and land values can attain "country club" like standards, mainly due to taxpayer subsidized public improvement.
With all these public efforts resulting in land value capitalization, a functional user fee must look to this value as its source. It does little good to "tax" the builder of "private" improvements, who is adding value to society through his labor and the use of natural resources, for a "user" fee. The builder in the process of building is not the end user of public services.
The landowner is the potential end user for and store of value from these public services. In contrast to the builder who brings value to the community through his product, the landowner absorbs value from the community, both public and private, through no effort of his own, other than ownership. If we truly want Systems Development Fees to be paid for by those who use and extract the value from these same public systems, then we need to look to this subsidized benefit for the fee. Beyond this fundamental fee, we should attempt to achieve a "market" value for the actual use of services such as water and power. At present, we are simply imposing an additional income tax aimed at a specific portion of the labor force.
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Posted By: Jahfre Fire Eater
Date: 2009-08-03 19:44:14
Hi Gene,
  We're fast approaching the collapse point for the ponzi scheme upon which the sprawl model is based.
The first in get their value out of the services. The last in wind up with gutted houses full of crackheads for neighbors. The cycle of boom and bust has been witnessed in many cities and regions but the overall trend has been toward growth. If the next 75 years undo that trend back to the mean I'd be intersted to hear how folks at the end of that decline view the notion that government services add value.
For me your scenario is irrelevant. I'd never live in such a place. I don't support the imposition of any licensing or permiting or fees by government. I believe in amortization and investment and believe that since these fees exist they should be paid by the builder then his individual business model should determine how that cost is recovered. Every business must follow a model to cover costs or the business isn't viable. Today, nearly every last business model depends on perpetual growth. The next several generations will learn different models.
you are right, any "public works" that occur in the area of land developement encourages "sprawl". Sprawl is simply use of more land than is necessary. "public works" by its nature takes value [taxes] from another area and directs it to a specific area, in this case land. so, sprawl will occur at the cost of some other "good".
and the first in, get the value through land appreciation, leaving the maintainence for someone else. that is the logic in extracting the value back out, rather than charging the builder, who is just the laborer.
Posted By: Jahfre Fire Eater
Date: 2009-08-04 06:21:27
Hi Gene,
 I don't see the builder as "just the laborer". They are a business, maximizing profits through efficiency and risk management. Regardless of my opposition to the concept of SDFs, where they exist they are simply part of the cost of doing business. No matter the nature or the intention of these fees, all costs are paid by the first consumer of any finished product.
My question is how would you go about getting the current voters, who have already paid these fees, to vote against future home owners having to "pay their fair share" for the services they will enjoy?
yes, "just the laborer"Â was not correct. the builder can also "labor" as a manager and can also provide capital, etc.
you are right in that unless the builder experiences a loss, all "costs" by definition are paid by the first consumer. But, whether that payment goes toward a fee or to labor or to profit is determined by the market and the builder's expenses, which can include the fees.
Voters, if voters actually get to determine fees and taxes, would have to believe that a land fee is a better way to go than confiscatory taxes. If we get to a point where we think using value that we don't create, such as land value, resource value, etc. for public funds is better than using value we create, such as income or sales tax, then it might be accepted.
"home" owners would still have a share, in that they usually own some "land". some locales like pittsburgh, have transferred the "property" tax primarily to land with good results.
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