Policy Two-Pager: Rethinking Development Charges
The case for lower-cost, more transparent infrastructure funding
Today, we have the first in MMI’s series of policy two-pagers, with a short briefing note on development charges. A PDF of the two-pager is available at the bottom of the page. We encourage you to share these widely, so policymakers and the general public can better understand both the issues and potential solutions.
Policy Brief: Development Charges
The Issues
Development charges (DCs) are levied on new residential, commercial, industrial, and institutional building construction to fund new infrastructure.
DCs are one of an alphabet soup of municipal housing taxes, including community benefit charges (CBCs), parkland dedication and other charges.
DCs have risen by more than 5,000% in some communities, adding up to $200,000 to the cost of a new home.
High DCs are an option; many communities have low DCs, while others, such as Sault Ste. Marie, ON have none whatsoever.
DCs are charged to the developer; these costs get rolled into the final cost of the home, increasing rents and home prices.
DCs are an expensive and inefficient way of financing infrastructure, adding billions to infrastructure costs. Because DCs are rolled into the price of a home, that infrastructure is ultimately financed at residential mortgage rates rather than at much lower government bond rates.
DCs are generationally inequitable as they concentrate expenses related to population growth and infrastructure renewal onto young homebuyers and renters.
DCs contribute to exurban sprawl, as DCs tend to be lower in smaller communities, causing families to “drive until you qualify” to a new home.
DCs lack transparency because they are hidden on the final bill and invisible to homebuyers.
Because DCs are embedded in the final price of the home, they are subject to HST and, in some jurisdictions, provincial sales taxes and land-transfer taxes, creating a tax-on-tax effect, so a $1 increase in DCs can raise the final price of a home by more than $1.
Development charge reform can save billions in unnecessary interest payments while simultaneously creating a fairer, more transparent, and equitable system for financing infrastructure construction.
The Solutions
Fund infrastructure through government debt tied to a revenue stream to lower interest costs. Instead of funding a water treatment plant through development charges, have a municipal water service corporation issue debt, which is repaid through a monthly levy on water users. This financing model better aligns the asset with its use, and the levy can be removed once the debt on the asset is repaid. This model can be applied to other assets financed by development charges, such as parking garages. Lifetime interest costs to finance that infrastructure are substantially lowered, as the interest rate on a government bond is substantially lower than that on residential mortgages or construction loans.
Implement a transparent direct-to-buyer development charge (DC) billing model that exempts DCs from HST. DCs (and related fees) should be treated like other new-housing purchase-related taxes and paid as a separate line item on the purchase agreement, ensuring new homebuyers know exactly how much they are paying in DCs. Charging at closing would save buyers and builders thousands of dollars in interest costs, and charging as a separate line item would allow governments to exempt development charges from HST, eliminating the development charge tax-on-tax. The home price should include the visible DCs, so the buyer can incorporate them into their mortgage, and the development charge rate should be “locked in” at the time of the purchase agreement, protecting the buyer from future development charge increases.
Reduce DCs through eliminating waste in the system and standardizing methodologies across municipalities. This should include eliminating wishlist projects from DC background studies, limiting hidden DC escalation by removing automatic indexing, and standardizing assumptions in DC background studies.
Increase coordination between municipal capital works and provincial and federal infrastructure plans. Creating predictable, shared investment in major growth-related infrastructure reduces pressure on municipal DC rates and enables projects to be delivered more efficiently and at lower cost.
Finance road and transportation infrastructure through charges more closely tied to transportation use, to lower interest costs and better tie assets to their use. In Ontario, nearly half of all development charges are used for roads, transit, and parking. Interest costs are reduced by financing them through government debt rather than residential mortgages, and a more equitable and direct way to repay that debt is through mechanisms such as fuel taxes, congestion pricing on roads (New York City), road user/vehicle miles travelled taxes (New Zealand, Germany), licence stickers/registration fees and parking fees.
Resources: A Pathway to Development Charge Reform, Ontario’s Development Charge Crisis In 10 Points, Ontario Development Charges: Everything You Wanted to Know But Were Afraid to Ask, Development Charges: 10 Things You Need to Know About Housing Taxes in Ontario.
