Tax Revenue Lost Over Building Permit Delays

Increasing the efficiency of the building permit process could add millions of dollars in tax revenues and significantly bolster the economic development of communities. The American Institute of Architects (AIA) commissioned a study from PricewaterhouseCoopers (PwC) LLP that concluded that the implementation of a more responsive permit process, over a five year period, could result in a 16.5 percent increase in property taxes and a 5.7 increase in construction spending.

“Within the last five to ten years there has been a substantial increase in the delays in building permits approvals,” AIA Chief Economist Kermit Baker, PhD, Hon. AIA explained in a prepared statement announcing the results. “Architects have frontline experience dealing with these delays, and the AIA commissioned this study to shed light on this problematic situation that works against the best interests of businesses and communities.”

The costs of regulatory delays on economic development are largely unseen because it is not readily apparent that buildings are not being built, potential tax revenues are not being collected, and related jobs are not present. Other highlights of the study include:

  • A three month acceleration in permit approval on a 22-month project cycle would make a project more financially attractive and could determine whether the project is undertaken at all.
  • Higher rents for all tenets are caused by permitting delays.
  • Improving permit processes can attract investment from areas outside a local community.
  • Accelerating the permitting process can permanently increase local government revenues.
  • Increasing construction spending caused by more efficient permitting process will provide broader economic benefits.

“Inefficient permitting processes are equivalent to drain on economic development. Project delays lead to higher costs either will be passed through to occupants or will discourage new construction. Less new construction, by reducing the total supply of buildings in a community, will tend to lead to higher rents for everyone,” said Linden Smith, Managing Director, PwC. “Conversely, a municipality with an efficient and predictable permitting process will attract investment by reducing the risk of scheduling delays and cost overruns. All else equal, investment dollars will be drawn to these municipalities.”

The significance of these findings in the context of a slowing housing market is open to discussion. Delays may decrease due to a decrease in the number of permits being sought. At the same time, the impact of any delays may increase because fewer permits are being sought.

“A gradual slowing of homebuilding appears more likely than a sharp drop because the elevated level of house prices will sustain home building as a profitable enterprise for some time,” the White House stated in its annual economic report to Congress.

Indeed, some communities have seen a decrease in the number of permits being sought. Gilbert, Arizona, one of the fastest growing cities of its size, has seen the number of permits sought drop by 40 percent in 2005. The town collects an average of $13,400 per home in system fees, so a decrease of that size represents a potential loss of $27 million, a significant negative impact on the town’s economy, the Gilbert Independent reports.

“There’s not a lot anybody can do about it,” Gilbert mayor Steve Berman told the Gilbert Independent. “We are shifting our focus from residential to retail. It’s one of those things. Sooner or later we are going to run out of room. All this is going to do is slow the train down long enough to count the cars.”

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