Do Impact Fees Do More Harm Than Good?

This week, we have a guest post from Obasi Shaw, a Stanford University JD/PhD student who spent this past summer as a legal intern at California’s Housing Defense Fund. He was kind enough to condense his research for HDF on impact fees into the below post. I learned a lot from it, and I think you will too. — N

Virtually all of California’s cities levy impact fees on housing development, on the theory that bringing in new residents comes at a significant cost to city budgets. Impact fees are a way of passing these costs on to developers and bringing in new revenue for the city. But by making development more expensive, they can have the effect of deterring new housing construction where it is most needed.

This problem is uniquely pronounced in California, where impact fees are both far more widespread and far more expensive than anywhere else in the United States. California’s housing developers must pay more than three times the national average in impact fees — and nearly twice as much as they would pay in Oregon, the next most expensive state. Overall, impact fees in California can add anywhere from $15,000 to over $150,000 per unit to the cost of constructing homes, depending on the jurisdiction.

When impact fees are this high, they have a tendency to discourage new construction and consequently contribute to higher housing costs. Which raises the question: are impact fees worth the price we all pay for them? While there is strong research on the cost of impact fees to developers, there is surprisingly little research describing the value that levied impact fees actually provide for cities. I did some digging into the costs and benefits of the four most expensive types of impact fees — school, park, affordable housing, and traffic fees. Ultimately, as I’ll explain below, none of these fees provide much value to cities, and most are actually  counterproductive to their purported aims.

Each impact fee is targeted to address a specific cost to the city, but they can also be considered in aggregate. Before we address their individual impacts, it’s helpful to ask: do impact fees increase or decrease city budgets overall?

Research shows that, although housing impact fees provide an immediate income boost to cities, they are net-negative for city budgets in the long run. This is because they discourage population growth, and residents are the primary source of city income. New residents bring increases in sales tax revenue, and, because Proposition 13 bars property tax reassessments on housing until it is substantially redeveloped, new builds often generate several times more property tax revenue than existing homes in California. By suppressing new development with impact fees, cities are essentially exchanging a consistent source of annual tax revenue for a one-time fee. 

But cities tend not to think about impact fees on this aggregate scale. Instead, they consider each fee only in its relation to a particular budget item, like the cost of maintaining parkland for all of their residents. By isolating these costs from the broader economic picture, cities can avoid reckoning with the fact that new residents bring in new revenue that offsets the costs associated with upgrading municipal infrastructure and services to accommodate a growing population. This allows cities to justify charging high fees, but it also means that they are hurting their own budgets without recognizing it.

Virtually all California jurisdictions impose impact fees¹ for capital funding for schools, at a maximum rate of $5.38 per square foot, or roughly $4,500 per average unit.² The basic justification for these fees is that new housing brings new students, which requires school districts to spend more money on school facilities.

But this reasoning is exactly backwards. New students are not the cause of districts' financial troubles; they’re the solution.

California schools receive the vast majority of their funding through a statewide allocation program called the Local Control Funding Formula (LCFF). LCFF allocates funding to schools based on a weighted count of daily student attendance. Schools receive a base grant of roughly $10,000 - $13,000 per year for every new student in attendance, plus supplemental funding for specific demographics. School impact fees, meanwhile, only generate a one-time per unit payout of $4,500 on average.

School districts across California are facing funding shortfalls due to a prolonged enrollment crisis. LAUSD alone has lost nearly half of its student enrollment over the last two decades, leaving more than 160,000 empty seats. Notably, this means that school facilities are underutilized, not overburdened — many schools desperately need new students to plug significant budget shortfalls. This is a problem that can only be solved by making it easier for families to move in, not by making it more expensive.

School districts see impact fees as a way to fill budgetary gaps, but this is a clear example of counterproductive back-budgeting: by forcing new residents to pay for existing budget shortfalls, school impact fees help to drive families out, worsening the downward spiral of school enrollment and school funding.

Park impact fees are arguably even worse than school fees. New residents often have little to no measurable impact on park expenses, and the extracted fees (in some cities, hundreds millions of dollars) often just sit unused.

Roughly 90% of CA jurisdictions impose impact fees for the expansion and capital improvement of public parks. Cities have significant discretion to set their park impact fees, so they range widely by jurisdiction. Riverside charges a flat rate of $3,045 in park impact fees for an apartment, while Palo Alto charges $44.20/sqft, or roughly $37,000 for an average one bedroom apartment. Sunnyvale uses an 3-park-acres-per-resident calculation that results in a fee of $50,965.20 for the same apartment.

Many cities model their park impact fees on the Quimby Act, a California law which allows cities to require subdivision developers to dedicate 3-5 acres of parkland per 1,000 residents, or pay the city an “in-lieu” fee at the price of acquiring the equivalent acres of parkland. While the Quimby Act does not apply to urban infill development, many California cities levy park impact fees on urban development as well, and use the Quimby “in-lieu” formula, or something like it, to determine the price of the fee.

Using the Quimby formula in urban areas has two major problems. First, the cost of acquiring parkland within an urban center is often astronomical; this is why cities like Palo Alto and Sunnyvale can charge tens of thousands of dollars per unit in park fees. Second, many of these same California cities don’t have space for more parkland in their urban centers. For these cities, the exorbitant park impact fees are useless. In Los Angeles, for example, over $200 million in collected impact fees has sat unspent, because there is nowhere to spend it.

In Fremont, where a developer must pay $19,000 in park fees alone to build an 800-square-foot, one bedroom apartment unit, the annual fee reports tell a similar story to that of Los Angeles. Roughly half of their collected park fees are earmarked for acquiring new parkland, while the other half are earmarked for capital development. The acquisition fund, which totaled $73 million at the end of fiscal year 2025, has been accumulating, barely used, for nearly a decade — its balance has more than doubled in the last eight years. There is no need for the city to spend it, because Fremont has over 100 acres of parkland per 1,000 residents, including regionally- and federally-owned land.

While Fremont’s capital expenditure fund is used more regularly, the relationship between the development it supports and the impact of new residents is often tenuous. (In fiscal year 2024, over $1 million was spent from Fremont’s capital expenditure fund for pickleball conversions.) And ironically, Fremont cites declining housing development due to “cost inflation” as one reason why they have not spent more on parkland capital development.

Roughly 80% of California jurisdictions impose local traffic mitigation fees, which are used for capital expenditures related to transit. The cost of these fees also vary widely by jurisdiction. In one recent case that went all the way to the Supreme Court, an El Dorado County resident challenged the $23,420 traffic mitigation fee that the county charged him to install a manufactured home on his property. In Fremont, building a one bedroom apartment costs $2,829 in traffic fees alone.

It is hard to say definitively what impact new residents have on traffic. Traffic patterns are complex and often very counterintuitive, to the point that traffic impact analyses are routinely criticized by scholars and have been called “junk science.” But there is evidence that cities are deploying traffic mitigation fees in ways that actually make traffic worse.

Most cities use a metric called Level of Service (LOS) to determine the impact of new residents on traffic congestion. LOS is a flawed metric in multiple ways, and research has shown that reliance on it tends to make traffic worse. 

LOS measures traffic congestion at individual roads and intersections, giving them an A-F rating based on the speed and volume of their traffic. By nature, dense urban residential areas and commercial corridors tend to have more traffic per lane (and thus worse LOS ratings) than areas of high sprawl. But this narrow understanding of road quality masks the many benefits associated with those dense corridors: far more amenities accessible by foot, bike, and transit; more economic activity and tax revenue generated per acre; and much shorter distances for drivers to travel even when the traffic moves more slowly.

On the contrary, the traffic that comes from sprawl comes with numerous additional costs, because residents must travel further distances to reach their destinations. Among other downsides, these longer-distance commutes come at a higher fuel cost, cause more pollution, and lead to more fatalities than commutes in denser cities. In 2020, the California legislature passed SB 743, which dropped LOS from California Environmental Quality Act (CEQA) evaluations due to findings that the use of the metric led to increases in sprawl and had a negative impact on human health. 

And because LOS focuses exclusively on the experience of those in cars, it actually discourages investment in pedestrian, bicycle, and transit infrastructure. (These investments tend to worsen LOS scores, because they slow cars down and reduce the physical space allocated to cars.) Instead, traffic mitigation impact fees tend to be used to fund car-centric improvements like road widenings and other car-capacity-increasing projects, which research has long shown simply induce more traffic.

Roughly a quarter of California jurisdictions, including most of the state’s largest cities, impose affordable housing impact fees on residential development. These fees are generally paid in lieu of including affordable housing units in the development. Like park and traffic fees, the cost of these fees vary widely by jurisdiction. In Fremont, the fee is $17.50/sqft, or nearly $15,000 per average one bedroom apartment unit. Recently, an East Palo Alto resident sued his city over a $54,891 affordable housing impact fee that it imposed as a condition of allowing him to build an ADU on his property.

The most common justification for affordable housing fees is that new residents purchase goods and services in the city, creating new service and retail jobs that need to be filled. To fill these lower-income jobs, the city needs to have affordable housing available. So housing developers are required to either include units for low-income renters, or pay a fee to offset the cost of providing additional housing.

Even these fees are ultimately counterproductive. Recent research has found that new market-rate housing development lowers nearby rents by 5% – 7% and causes a “migration chain” — a supply-and-demand phenomenon in which people move into new units, lowering the cost of their old units so that residents with slightly lower-income can move in, and further extend the chain. Two separate analyses have found that, for every 100 high-end housing units built, the migration chain opens up between sixty-six to seventy below-median-income units within two to five years. Ultimately, this means that the development of new market-rate units opens up affordable housing, and lowers housing prices across the board.

Expensive affordable housing impact fees like Fremont’s only generate enough funding to build roughly two affordable units per 100 apartments built,³ and they come with the significant side effect of suppressing development overall, thereby exacerbating the housing shortage that is driving up rents in the first place. Recognizing this problem, the East Palo Alto city council, which charged the aforementioned $54,000 affordable housing fee for an ADU, has since rolled back such fees for ADUs, and is currently considering an even broader rollback of all of their affordable housing fees.

Impact fees are attractive to cities because they provide immediate revenue at minimal political cost (few constituencies bat an eye at fees charged to developers). But the long-term costs—in declining school funding, rising housing costs, and more—are severe.

California cities and residents don’t have to take this deal. East Palo Alto has set a promising example by removing their affordable housing fee for ADUs; hopefully they will follow through by dropping the fee entirely, allowing housing to truly become more affordable. Other cities should follow suit, and begin dismantling all of the fees that make California cities harder to live in.

And if state legislators want to really end the statewide housing crisis, they should take note of the harm caused by impact fees, which are one of the primary costs of development in California. Zoning reform is a crucial and necessary step, but even the most permissive zoning can’t produce housing if developers can’t afford to build. For those who are serious about housing reform, the next step on the pro-housing agenda should be to end unnecessary impact fees for good.