Can a Maryland town charge new home developments an impact fee to pay for police and fire protection?

Plain-English summary

The City of Taneytown asked the Attorney General whether it could impose a development impact fee on new residential development to fund additional police protection and, separately, to help fund fire protection provided by a local volunteer fire company the City partly supports. The City's own lawyer had already concluded the City lacked authority to do this without state enabling legislation, and the opinion agreed.

The opinion explained that a municipality cannot impose any new tax or fee without General Assembly authorization, and that this constitutional restriction applies whether the charge is labeled a tax or a regulatory fee. Maryland municipalities do have general authority to impose regulatory fees under Article 23A, §2(b)(33)(ii), but that authority only covers charges that are genuinely regulatory, meaning the fee must be reasonable and tied to the cost of the specific service or process it funds (the "rational nexus" test), with the revenue earmarked to benefit the specific properties charged. If a fee is instead primarily a revenue-raising measure, it is a tax that requires separate enabling legislation from the state legislature.

Applying that framework, the opinion found it very unlikely that a police or fire protection impact fee could satisfy the regulatory-fee test, since police and fire coverage benefits an area generally rather than tying revenue to a specific, provable cost of serving new development. The problem was especially acute for the fire protection fee, because the City's financial support for the volunteer fire department was voluntary rather than a legal City obligation tied to properties served.

Currency note

This opinion was issued in 2004. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, fee authority, or classification mentioned here.

Common questions

Could a Maryland town charge new housing developments a fee to cover the added cost of police patrols?
Not without state authorization, according to this opinion. It concluded the City would need to seek enabling legislation from the General Assembly to impose the fee as an excise tax, because such a fee would likely be treated as a tax (not a valid regulatory fee) since it is difficult to tie police protection costs to specific new development in the way the regulatory-fee test requires.

Can a city require new developments to help pay for a volunteer fire department?
This opinion found that unlikely to work as a regulatory fee, particularly because the City's financial support for the volunteer fire company was voluntary rather than a fixed obligation, which undercut any argument that the fee reflected the actual cost of a service the City was legally providing to those properties.

What would a municipality need to do to legally charge this kind of fee?
Under this opinion, the City would need the General Assembly to pass enabling legislation, applicable to municipalities generally, authorizing the fee as an excise tax and specifying what kinds of costs it could cover. Alternatively, a fee structured as a true regulatory charge could work only if it satisfied the two-part rational nexus test: a reasonable connection between new development and the need for the additional service, and a reasonable connection between the revenue collected and a benefit to the specific properties charged.

Background and statutory framework

Article 14 of the Maryland Declaration of Rights and the municipal home rule provision at Article XI-E, §5 of the Maryland Constitution require General Assembly authorization before a municipality can levy any new tax, license fee, franchise tax, or fee not already in effect on January 1, 1954. Following Campbell v. City of Annapolis, which held this restriction reaches regulatory fees as well as taxes, the General Assembly restored general municipal authority to impose regulatory fees and charges under Article 23A, §2(b)(33)(ii).

The opinion applied the Court of Appeals' decision in Eastern Diversified Properties, Inc. v. Montgomery County, which held that a development impact fee for road construction was a tax rather than a regulatory measure because it was predominantly a revenue-raising device untethered to the actual cost of a service provided to the properties charged, quoting the purpose-based test from Theatrical Corp. v. Brennan. It also applied the "rational nexus" test used by courts to evaluate impact fees framed as regulatory measures, which requires both a reasonable connection between new development and the need for additional facilities or services, and a reasonable connection between the fee revenue and the benefit to the specific properties assessed, drawing on the regulatory-fee standard described in Mayor of Ocean City v. Purnell-Jarvis, Ltd. The opinion distinguished this from prior instances where the General Assembly granted specific counties impact fee authority by statute, such as Carroll County's authority under Article 25, §9, code home rule counties under Article 25B, §13D, and a municipal bus/ride-sharing special taxing district under Article 23A, §44(b).

Citations and references

Statutes:
- Article 14 of the Maryland Declaration of Rights, requiring General Assembly authorization for any tax or fee
- Maryland Constitution, Article XI-E, §2 and §5, the municipal home rule provisions classifying municipalities and requiring General Assembly authorization for new municipal taxes and fees
- Article 23A, §2(b)(33)(ii), granting municipalities authority to establish and collect reasonable regulatory fees and charges
- Article 23A, §10, declaring all Maryland municipal corporations a single class for constitutional purposes
- Article 25, §9, granting Carroll County authority to impose impact fees
- Article 25B, §13D, granting code home rule counties authority to impose impact fees
- Article 23A, §44(b), authorizing a municipal special taxing district for a bus or ride-sharing system
- Natural Resources Article, §8-1103(i)(2)(ii)2, referencing fees and charges authorized under Article 23A, §2(b)(33) for ocean beach replenishment

Cases:
- Campbell v. City of Annapolis, 289 Md. 300, 305, 424 A.2d 738 (1981), holding the constitutional restriction on new municipal taxes applies to regulatory fees as well
- Mayor of Ocean City v. Purnell-Jarvis, Ltd., 86 Md. App. 390, 404, 586 A.2d 816 (1991), on the reasonableness standard for a regulatory fee
- Allied Am. Mut. Fire Ins. Co. v. Comm'r of Motor Vehicles, 219 Md. 607, 616, 150 A.2d 421 (1959), on revenue-raising measures needing no connection between the tax subject and use of revenue
- Eastern Diversified Properties, Inc. v. Montgomery County, 319 Md. 45, 570 A.2d 850 (1990), holding a road-construction impact fee was a tax rather than a regulatory measure
- Theatrical Corp. v. Brennan, 180 Md. 377, 381-82, 24 A.2d 911 (1942), establishing the purpose-based test for distinguishing a regulatory fee from a tax
- Waters Landing Ltd. Partnership v. Montgomery County, 337 Md. 15, 25, 650 A.2d 712 (1994), later confirming the Eastern Diversified impact fee was an excise tax

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/2004/89oag212.pdf

Original opinion text

212 [89 Op. Att'y

                    MUNICIPALITIES

I MPACT F EES – W HETHER I MPACT F EES M AY B E U SED TO
D EFRAY C OST OF P OLICE AND F IRE P ROTECTION S ERVICES

                    November 18, 2004

Anne-Herbert Rollins, Esquire
City of Taneytown

  On behalf of the City of Taneytown, you have requested our

opinion on the authority of the municipality to impose development
impact fees for police and fire protection services. Specifically, you
raised the following questions:

        1. May a municipal corporation impose an impact fee on

residents of new developments located within the municipal
corporation to fund additional police and fire services?

        2. If so, may the municipal corporation impose such a fee for

additional fire services where the fire department is not a municipal
department but, rather, a local volunteer fire department to which the
municipal corporation contributes funding?

 You provided us with your legal analysis, which concluded that

the municipality lacks authority to impose impact fees for these
purposes without enabling legislation from the General Assembly.

  For the reasons explained below, we generally agree with your

conclusion. Absent authorization by the General Assembly, a
municipal corporation may not impose a development impact fee for
any purpose, if the law creating the fee is primarily a revenue
measure and the impact fee is therefore a tax. Thus, enabling
legislation by the General Assembly would be necessary to impose
such a fee. Under existing statutory authority, a municipality may
impose an impact fee as part of a regulatory measure. However, in
that case, there must be an adequate nexus between the charge
imposed and the cost of the services to the property assessed, and the
revenue must be appropriately earmarked so as to substantially
benefit that property. This is unlikely to be the case for fees related
to the provision of police and fire protection services, particularly if
the City's contributions to a volunteer fire department are voluntary.

                               I

                 Development Impact Fees

A. Impact Fees

  The phrase "impact fee" is used to describe a fee that is tied to

the approvals required for a new development and that is in addition
to ordinary fees for required permits. 71 Opinions of the Attorney
General 214, 215 (1986). Impact fees are imposed to offset the cost
of infrastructure or public facilities necessary to support new
development. See Tiburzi, Impact Fees in Maryland, 17 U. Balt. L.
Rev. 502 (1988). In principle, an impact fee reflects the
proportionate share of the capital cost of providing a certain service
to individual dwelling units or other consuming units that begin
using that service for the first time. Id. at 503. From a municipal
finance perspective, there are two advantages to impact fees: First,
the cost of improvements is shifted from existing taxpayers or
customers to those responsible for new development; second,
revenue is collected before improvements are constructed, rather
than afterward. Id. at 502-3. Payment of an impact fee may be a
condition precedent to certain action by municipal officials, i.e.,
issuance of a building permit or approval of a subdivision plat.

B. Authority to Impose Impact Fee

  A local government may not impose a tax or fee, including an

impact fee, without authorization from the General Assembly.
Article 14 of the Maryland Declaration of Rights provides "[t]hat no
aid, charge, tax, burthen or fees ought to be rated or levied, under
any pretense, without the consent of the Legislature." The 1954
constitutional amendment that granted home rule to municipal
corporations sets forth a similar limitation: "No ... municipal
corporation shall levy any type of tax, license fee, franchise tax or
fee which was not in effect in such municipal corporation on January
1, 1954, unless it shall receive the express authorization of the
General Assembly for such purpose, by a general law which in its
terms and its effect applies alike to all municipal corporations in one
or more of the classes provided for in Section 2 of this Article."
Maryland Constitution, Article XI-E, §5.[1]

C. Nature of Impact Fee as Tax or Regulatory Measure

   The constitutional restrictions apply regardless of whether a fee

is a regulatory measure or a revenue-raising tax. Campbell v. City
of Annapolis, 289 Md. 300, 305, 424 A.2d 738 (1981). However, in
a particular case, the validity of an impact fee may depend on
whether it is more aptly characterized as a regulatory measure or a
tax, since municipal corporations have statutory authority to impose
regulatory fees, but lack general taxing authority.

  A regulatory fee must be "reasonable and have some definite

relation to the purpose of [the regulatory] scheme." Mayor of Ocean
City v. Purnell-Jarvis, Ltd., 86 Md. App. 390, 404, 586 A.2d 816
(1991). In contrast, a "revenue-raising" measure or tax (other than
a special assessment) need not have any connection between the
subject of the tax and use of the resulting revenue. Allied Am. Mut.
Fire Ins. Co. v. Comm'r of Motor Vehicles, 219 Md. 607, 616, 150
A.2d 421 (1959). Unlike a regulatory fee, the amount of a revenue-
raising measure is not subject to judicial review. Mayor of Ocean
City, 86 Md. App. at 405.

  In Eastern Diversified Properties, Inc. v. Montgomery County,

319 Md. 45, 570 A.2d 850 (1990), the Court of Appeals held that an
impact fee imposed to pay for road construction constituted a tax,
rather than a regulatory measure. In that case, the impact fee was
imposed prior to the issuance of a building permits in two designated
"planning policy areas" of Montgomery County to pay for road
construction. The fee was intended to reflect a pro rata share of the
costs resulting from new development. In enacting the impact fee,
the County relied, not on its taxing authority, but on "its home rule
powers, including its police power to ensure and coordinate the
provisions of adequate transportation facilities with new
development ...." 319 Md. at 49. Revenue collected from the impact
fee was dedicated to road improvements in the planning area in
which the fee was assessed. Id. Eastern Diversified challenged the
fee, arguing that it was an unauthorized excise tax. Id. at 51.

 The Court noted that the classification of an impact fee as a

regulatory measure or a tax depends on the purpose of the
enactment, rather than the label attached to it. 319 Md. at 53. The
Court adopted the following basis for distinguishing the two:

        A regulatory measure may produce revenue,
        but in such a case the amount must be
        reasonable and have some definite relation to
        the purpose of the Act. A revenue measure,
        on the other hand, may also provide for
        regulation, but if the raising of revenue is the
        primary purpose, the amount of the tax is not
        reviewable by the courts. There is no set rule
        by which it can be determined in which
        category a particular Act primarily belongs.
        In general, it may be said that when it appears
        from the Act itself that revenue is its main
        objective, the enactment is a revenue measure.
        ... [W]here the fee is imposed for the purpose
        of regulation, and the statute requires
        compliance with certain conditions in addition
        to the payment of the prescribed sum, such
        sum is a license proper, imposed by virtue of
        the police power ....

Id. at 53, citing Theatrical Corp. v. Brennan, 180 Md. 377, 381-82,
24 A.2d 911 (1942) (internal citation omitted). The Court concluded
that the impact fee imposed by Montgomery County was
predominantly a revenue-raising measure. Nothing in the local
legislation establishing the impact fee suggested that the fee was
charged solely based on service provided to new development or that
it was designed to defray expenses of the development regulatory
process. Furthermore, the sole condition imposed in connection with
the fee was its payment. Although the County argued that the
purpose of the fee was to regulate development, the revenues were
devoted to road construction in a large area. To qualify as a
regulatory measure, it was not sufficient that "the property owner
receive some benefit from the improvement." Rather, the amount of
the fee would need to "be reasonable and have some definite relation
to the purpose of the Act." Id. at 53-55. Thus, the impact fee in that
case constituted a tax that the County lacked authority to impose. Id.
at 55.[2]

  The Court's decision does not suggest that an impact fee could

never be imposed as a valid regulatory measure. In reaching its
decision, the Court emphasized that the primary purpose of the
Montgomery County impact fee was to raise revenue and that the
fees were not sufficiently linked to services provided or to the
expense of the regulatory process. 319 Md. at 54-55.

                                II

       Municipal Authority to Impose Impact Fees

A. Legislation Authorizing Impact Fees

  Unless authorized by public local law before 1954 or by public

general law, a municipal corporation lacks authority to impose any
form of excise tax, including an impact fee that would be construed
as a tax under Eastern Diversified Properties. When the General
Assembly has granted explicit authority to local governments to
impose impact fees, that authority generally has been limited to
financing capital improvements. See, e.g., Annotated Code of
Maryland, Article 25, §9 (authority of Carroll County to impose
impact fees); Article 25B, §13D (authority of counties that have
adopted code home rule to impose impact fees); but see Annotated
Code of Maryland, Article 23A, §44(b) (authority for municipal
corporation to create special taxing district for bus or ride sharing
system; use of impact fees as well as ad valorem taxes to support
both capital and operating costs).

B. Article 23A, §2(b)(33)

The General Assembly has granted municipalities the general

power to assess regulatory fees:

          In addition to, but not in substitution of, the
        powers which have been, or may hereafter be,
        granted to it, [a municipal] legislative body
        also shall have the following express
        ordinance-making powers:
                              ...
              (33) Subject to the limitations imposed
        under Article 24 of the Code, the Tax-General
        Article, and the Tax-Property Article, to
        establish and collect reasonable fees and
        charges:
          ...
               (ii) Associated with the exercise of any
        governmental or proprietary function
        authorized by law to be exercised by a
        municipal corporation.

Annotated Code of Maryland, Article 23A, §2(b)(33)(ii). The
authorization to impose "reasonable" fees and charges indicates that,
in enacting §2(b)(33)(ii), the Legislature was conferring authority to
impose regulatory charges rather than taxes.[3]

C. Rational Nexus Test

  To justify imposition of impact fees on new development as a

regulatory measure under Article 23A, §2(b)(33), there must be a
sufficient nexus between the fee assessed and the proportional cost
of providing the benefits supported by that fee to affected property
owners. The Court of Appeals alluded to the need for such a nexus
in Eastern Diversified, but did not articulate a specific standard for
determining whether a nexus exists. While courts in other states
have relied on a number of alternative standards in considering the
validity of impact fees, the "rational nexus" test predominates. See,
e.g., Blaesser & Kentopp, Impact Fees: The "Second Generation,"
38 Wash. U. J. Urb. & Contemp. L. 55, 100 (1990).

   Under the rational nexus test, an impact fee is permissible as

a regulatory measure, so long as (1) the fee relates to needs
attributable to new development, and (2) the revenue collected is
earmarked for the substantial benefit of the development charged.
8 McQuillin, The Law of Municipal Corporations § 25.118.60 (3rd
ed. rev. 2000). Thus, there are two steps in the analysis: first, the
municipality must be able to demonstrate a reasonable connection,
or rational nexus, between the population growth resulting from new
development and the need for additional facilities; and second, the
municipality must be able to show a reasonable connection, or
rational nexus, between use of the revenue generated by the fee and
benefits accruing the project or property assessed. Id.

                              III

            Police and Fire Protection Services

 The impact fee contemplated in your request is unusual in that

it would relate to the municipality's cost of providing additional
police and fire protection services, rather than to the cost of capital
improvements. As noted above, impact fees are generally used to
help defray the cost of infrastructure required to accommodate new
development. However, it may be possible to recover the operating
cost of municipal services resulting from new development through
an impact fee.

A. Impact Fees as an Excise Tax - Enabling Legislation

  Before enacting a local ordinance to impose an impact fee for

services, the municipality could seek enabling legislation through the
General Assembly allowing it to impose the fee as an excise tax.
Such legislation would need to be enacted as a public general law,
applicable to each municipality governed under the municipal home
rule amendment. Maryland Constitution, Article XI-E, §5; Article
23A, §10. The enabling legislation should be drafted to describe the
permissible uses for which impact fees might be imposed. The
advantage of this approach is that there would be no need to show a
nexus between the assessment and the use of the revenue.

B. Impact Fees as a Regulatory Measure - Additional Police

   In Eastern Diversified Properties, the Court of Appeals made

clear that a regulatory fee must have some connection to the
underlying purpose of the legislation, beyond revenue generation.
319 Md. at 54-55. If the sole condition required by the ordinance
would be payment of an impact fee to obtain a building or
development permit, the fee would constitute a tax. On the other
hand, if the ordinance prescribed minimum police service levels for
the municipality and adopted a formula or model under which the
fee would be calculated, in theory it could reflect the need for
additional police services based on the impact of new development.
See, e.g., Kelly, Development Impact Fees: Modeling Future Growth
and Economic Development in a South Carolina Community, 20
Int'l. J. Pub. Admin. 1599, 1606 (1997) (treating cost of police
officer as capital asset for purposes of calculating impact fee).

  The second part of the rational nexus test requires that there be

a reasonable connection between the use of the revenues derived
from the impact fee and benefits accruing to the project or property
assessed. A regulatory fee must be based either on the expense of
the regulatory process or, in this case, on the cost of services
provided. However, it is not sufficient that the property owner
receive some benefit from the services. Rather, the fee must be
reasonable and have some definite relation to the purpose of the
ordinance. Eastern Diversified, 319 Md. at 55. Stated otherwise,
revenues must be earmarked to provide police protection in the
specific area assessed, and the fees must be proportional to the cost
of providing the services. Unless the revenues were devoted to the
provision of police services in the specific area of assessed property,
an impact fee would likely be invalidated as an unauthorized excise
tax.

C. Impact Fees as a Regulatory Measure - Support of Volunteer
Fire Department

  You asked whether a municipality may impose impact fees to

support the services of a volunteer fire department. It is not clear
whether the City is legally obligated to make payments to the
volunteer fire company based on properties served, or whether its
contribution is voluntary. If the payments are voluntary, it does not
appear that an impact fee could be justified based on the
municipality's cost of serving new development. If they are not, a
regulatory fee would need to be structured to satisfy the two-part
reasonable nexus test.

                             IV

                         Conclusion

   If the City of Taneytown desires to impose development impact

fees on new development to help pay for police and fire protection
services, it would be prudent to seek enabling legislation from the
General Assembly, applicable to all municipalities, authorizing
imposition of impact fees as an excise tax and addressing the types
of activities that can be financed in this manner. In theory, the City
might be able to structure an impact fee as part of a regulatory
measure, if the fee were based on the costs attributable to providing
services to the new development and the revenues were earmarked
to provide those services to the development assessed. However,
this is unlikely to be the case with most fees related to such services,
particularly if the City's payments to a volunteer fire department are
voluntary.

                                      J. Joseph Curran, Jr.
                                      Attorney General

                                      William R. Varga
                                      Assistant Attorney General

Robert N. McDonald
Chief Counsel
Opinions and Advice

[1] Article XI-E, §2 of the Maryland Constitution requires that the
General Assembly classify municipal corporations into not more than four
classes based on population. The General Assembly has complied with
this mandate by declaring that all municipal corporations constitute a
single class. Annotated Code of Maryland, Article 23A, §10.

[2] The Court did not need to decide whether the impact fee was
properly characterized as a property tax, excise tax, or other type of tax.
Id. at 55, n.4. However, in a subsequent decision, the Court made clear
that the impact fee at issue was an excise tax. Waters Landing Ltd.
Partnership v. Montgomery County, 337 Md. 15, 25, 650 A.2d 712
(1994).

[3] Article 23A, §2(b)(33) was enacted as an emergency measure after
the Court of Appeals struck down a fee imposed in connection with a
municipal residential licensing scheme. See Chapters 565 and 684, Laws
of Maryland 1981, superseding Campbell v. City of Annapolis, 289 Md.
300, 424 A.2d 738 (1981). That legislation was intended to "restore to
municipal corporations the broad authority 'heretofore thought to exist' to
levy fees and charges in connection with the exercise of their lawful
powers." 67 Opinions of the Attorney General 307, 310 (1982).

 In a 1986 opinion, Attorney General Sachs relied on §2(b)(33) to

conclude that the Town of Ocean City could impose an impact fee on new
development to fund its local share of the cost of beach restoration efforts.
71 Opinions of the Attorney General 214 (1986). That opinion preceded
the Eastern Diversified decision and did not focus on the distinction
between a tax and a regulatory fee. The conclusion that the proposed
Ocean City fee would be permissible was supported in part by a provision
in several bills then pending before the General Assembly (now codified
at Annotated Code of Maryland, Natural Resources Article,
§8-1103(i)(2)(ii)2, that authorized replenishment of the ocean beach and
required a local contribution, specifically referencing "fees and charges
authorized under Article 23A, §2(b)(33)." Id.