The Building Tax is an Impact Fee

Originally published on Progress and Poverty on November 5, 2026. Republished on Progress.org with permission.

Local governments are increasingly imposing “impact fees” on new development; these are one-time fees that developers must pay every time they want to build something. Impact fees are meant to offset the costs of new construction (for example, increased traffic), and are supposed to be grounded in real costs directly caused by new construction. Courts therefore require impact fees to have an ‘essential nexus’ to the burden the new development creates and to be roughly proportional to it: in 2024, the Supreme Court extended this standard to fees set by legislatures in Sheetz v. El Dorado County. Unfortunately, in real life, impact fees have regressive effects, suppress construction and raise housing costs. Rightly, those who support lifting restrictions on housing, especially affordable housing, also support lowering, reforming, and even abolishing impact fees.

Impact fees have a close cousin known as a “building tax,” which has similar bad effects, but which receives far less attention in YIMBY circles. Building taxes are taxes imposed by local governments on all construction, not just new projects. Additionally, they are proportional to the building’s market value, and are charged every year, not just a single time up-front. Simply put, the more someone builds, the more they pay, forever. The predictable result is a lot less construction.

This “building tax” has been hiding in plain sight all along–lurking inside every conventional property tax. This is because property taxes are actually two taxes bundled together, not one. The first part is a tax on the value of land (which is good), and the second part is a tax on the value of the building, having all the same negative effects of an impact fee (which is bad).

Pro-housing advocates have begun pushing back against high impact fees, as featured in Strong Towns, Public Comment, and Reason Magazine. Analysis estimating the costs of impact fees has been conducted by RAND, the Terner Center, and the wider academic literature. This has led to litigation and corrective legislation in states like California, Montana, and Florida. The pro-housing movement should direct the same righteous energy at removing the equally damaging building tax.

When a landowner decides to build a housing project, they add value to the taxable property on their land, directly increasing their building tax burden. As long as a building tax is in place, more construction means more taxes. The mechanism for how this leads to fewer homes is exactly the same as the mechanism by which an impact fee harms construction: high fees discourage builders from building improvements because the government-imposed costs make the project financially unviable. A builder considering the viability of a new apartment complex must also account for the fact that every additional unit or square foot they build comes with a perpetual added building tax liability.

The average U.S. impact fee charged was roughly 4% of the median home price1. By comparison, a building tax is 1.6 to 2 times as large: levied at the national effective property tax rate of 0.89%, it’s about 7 to 8 percent of a new home’s price2. The effective rate is often higher for apartments, which are not classified as homesteads. Whether the tax is due during construction or only once a building is placed in service, it raises the cost of construction, reduces what buyers are willing to pay, and cuts the builder’s expected profit, just as an impact fee does.

For an illustration, we can look to Austin, where water and wastewater impact fees add $7,700 to the cost of a home built on a lot platted since October 20233. Austin’s property taxes are about $2.1211 per $100 of assessed value.4 With a February 2026 median sale price of $540,000 for Austin homes, this creates a yearly property tax of about $11,454 before any exemptions. Given official land value figures, about $5,956 of that bill is for the building tax.5 At a 5% discount rate, the first year’s building tax is worth $5,672 today and the second year’s is worth $5,325. By the end of year two, building taxes on the property have a net present value of about $11,000, already surpassing the impact fee of $7,700. Over 30 years, the net present value of building taxes on a single home grows to $77,200, 10 times the impact fee.6

Tampa tells the same story, even when we look at apartment complexes. The total impact fee for a new apartment there will soon be about $10,000 per unit7. Property taxes inside the City of Tampa are about $19.8428 per $1,000 of assessed value. With Class A apartments trading at about $283,000 per unit, this creates a yearly property tax of about $5,616 per unit. Official land values imply about $4,492 of that bill is building taxes. By the end of year three, building taxes have a net present value of about $12,100, higher than the impact fees8. Over 30 years, the net present value of building taxes on a single unit grows to $58,200, roughly 5.8 times total impact fees9.

Lubbock, Texas shows where the cost of growth goes when a city drops impact fees and changes nothing else. In August 2025, the city council voted to set its roadway impact fee to zero. The program had charged developers 25 percent of the cost of new thoroughfares and had collected about $14 million since 2021. The city engineer had said those fees reduce the burden on the general fund, and one councilmember called the repeal an indirect tax increase. The roads still have to be built. One developer who argued for repeal proposed funding them with city road bonds instead, and Lubbock voters had already approved more than $300 million of them. Bonds are repaid through the property tax, which falls on the value of every building, new ones included, every year. The cost of growth doesn’t disappear when the one-time fee does. It moves to the tax that recurs.

At the same time, we are in no way opposed to property taxes in general–just the building taxes bundled into them. Should the ongoing tax revolt against property taxes succeed, abolishing not just the building component of the tax but also the land value component, two bad things would happen. First, land speculation and idle land hoarding of the most valuable lots in town would be supercharged. Second, local governments would be left with no alternative but to turn to even more regressive and damaging taxes such as income taxes and sales taxes, not to mention tolls and fees on anything that moves:

Those who wish to “abolish” property taxes would be wise to redirect their energy to the one portion of the tax that is actually bad: building taxes, and leave the land component, which can be taxed in a way that increases building and growth, alone. Short of that, a reasonable compromise is simply to introduce a 10-year abatement on the improvement value of new construction, which is easier to implement and yields much of the same effects, while holding overall property tax revenue neutral.

Impact fees and building taxes are two versions of the same bad policy: both charge people for adding homes, resulting in fewer homes getting built. Pro-housing advocates are right to oppose impact fees, and the same logic should make them oppose building taxes with equal or even greater force, given they recur every year instead of hitting just once.

Impact fees are bad; pro-housing advocates should get comfortable saying the same thing about building taxes.