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The Hidden Tax on Housing: How Soft Costs Are Crushing Affordability

These plains were made for building. I'm going to miss the general store, Harriet.

The Hidden Tax on Housing: How Soft Costs Are Crushing Affordability

By ML Solutions Research Group · November 8, 2025

Builders are used to talking about lumber, labor, interest rates, and supply chains. But in 2025, the quiet story behind every blown pro forma is different: soft costs—especially municipal fees, specialdistricts, permitting delays, and NIMBY politics—have become a hidden tax on housing. The National Association of Home Builders (NAHB) estimates that government regulation accounts for 23.8% of the final price of a new single-family home in the United States, with 10.5% attributed to development and 13.3% to construction.1
In Washington State, a 2025 analysis found that regulations now account for 29.5% of the final price of a typical new single-family home, approximately $203,976 on a $690,701 house.2  Put simply: what many builders once assumed was a 10–15% “regulation slice” has, in many markets, quietly moved into the 20–30% range.
This analysis complements our ongoing work on “Builders vs. Rising Costs” and “The Changing Face of Labor”. Together, they map how today’s builders are being squeezed from every direction.

What Counts as “Soft Costs” in Residential Construction?

Builders define “soft costs” to mean all of the non-physical inputs required to turn a parcel into a completed home:
  • Entitlement, zoning, and subdivision approvals
  • Impact fees, system development charges, and other exactions
  • Water and sewer tap fees, capacity, and connection charges
  • Building, plan-review, and inspection fees
  • Required reports and studies (traffic, wetlands, environmental, geotechnical)
  • Special district taxes and assessments (LIDs, MUDs, PIDs, SIDs, and similar entities)
  • Legal, carrying, and financing costs associated with delay
NAHB’s 23.8% figure aggregates these items into a single number.1 But the way those costs show up on the builder’s spreadsheet—and ultimately on the buyer’s closing statement—varies dramatically by state and city.

Special Districts: When “Invisible Government” Drives the Tax Bill

One of the most consequential shifts in the last two decades has been the rise of special purpose districts. These include:
  • LIDs – Levee Improvement Districts
  • MUDs – Municipal Utility Districts
  • PIDs – Public Improvement Districts
  • SIDs – Special Improvement Districts and similar local entities

In Texas, a recent investigation found that the number of special-purpose taxing districts has nearly doubled since 1998, reaching roughly 2,300 districts, and that they now collect more than $12.7 billion a year in property taxes—about 16% of all property-tax revenue in the state.3 Nearly half are MUDs, often formed to finance infrastructure in fast-growing areas just outside city limits. In some neighborhoods, homeowners in MUDs can face effective tax rates that are nearly three times those in nearby cities.3 At the neighborhood scale, the story gets even more concrete.

In Sugar Land, Texas, the Fort Bend County Levee Improvement District No. 2 (FBCLID 2) provides flood and stormwater protection for more than 9,000 homes and hundreds of businesses in the First Colony area, funded through its own property tax rate dedicated to levee maintenance and improvements.4,5 Without that district, those homes would not exist in their current form, protected from the possibility of a disastrous flood event. With it, every home carries an additional layer of tax beyond the city, county, and school district.

Of course, special districts absolutely solve real infrastructure problems. The concern from a builder’s perspective is that they increasingly function as off-balance-sheet municipal finance tools, quietly capitalized into land prices and monthly payments.

Impact Fees and Tap Fees: The Stacked Charge on Every New Lot

Beyond district taxes, new construction typically faces a long list of one-time charges:
  • School impact fees, park in-lieu fees, and traffic or roadway fees
  • Water and sewer connection (tap) fees and plant investment charges
  • Stormwater and drainage fees
  • Building permit, plan-check, and inspection fees

HUD describes impact fees as one-time charges applied to new development to help ensure that communities can maintain adequate public facilities in the face of growth.6 California’s Department of Housing and Community Development notes that new housing in that state typically pays stacked school impact fees, park in-lieu fees, sewer and water connection fees, and building permit fees, which are often assessed across multiple agencies and special districts.7

In Washington State, a 2024 impact-fee study found that the combined average impact fees on a new single-family home are about $18,432 per dwelling—and significantly higher in some jurisdictions such as Issaquah.8 A separate 2025 report by the Washington Center for Housing Studies concluded that overall regulations now account for about 29.5% of the price of a new single-family home in that state, or roughly $204,000 on a median new home.2

At the city level, the picture is similar:
  • In Denton, Texas, the city maintains a detailed development-fee structure and is currently updating its water and wastewater impact fees, with a new schedule and implementation timeline adopted in 2025.9,10
  • In Aurora, Colorado, the 2025 development and connection fee schedule lists distinct water service connection fees, sanitary sewer connection fees, tap charges and metro wastewater fees, all due before connection or certificate of occupancy.11
  • In California, a major statewide study by the Terner Center at UC Berkeley concluded that development fees “add up and substantially increase the cost of building housing,” and that projects often face additional exactions not even codified in posted fee schedules 12
From a builder’s vantage point, this is all still “soft cost.” But on a 50-lot subdivision, stacked impact and tap fees alone can easily represent hundreds of thousands of dollars that must be spread across the final home prices.

Permitting Delays and Water Constraints: Time Is Its Own Fee

Even when fee schedules are known and published, unpredictable timelines can erase the viability of a project. NAHB, BIAW and others have documented how permit reviews that once took a few months now stretch well beyond a year in some markets, with carrying costs and interest compounding the impact of formal fees.2,13 In the Pacific Northwest:
  • Seattle’s Department of Construction & Inspections (SDCI) implemented a 6.5% inflationary increase to most of its fees on January 1, 2025, raising its base hourly rate for many services to $274 and increasing land-use hourly rates even higher.14 A related fee summary notes that construction-permit fees for 2025 increased on average by double digits for many project types.15
  • In nearby King County, most permit-related fees for building and land-use permits rose by about 49% for 2025 under the county’s new fee ordinance.16

In Western and Southwestern states, water adds another constraint. Colorado and Arizona jurisdictions have adopted multi-layered water and wastewater development fees, while fast-growing Texas cities such as Conroe and Beaumont are actively considering or expanding impact-fee programs for water, wastewater and parks to keep pace with growth.17,18

For builders, the math is simple: every additional month in the entitlement and permitting pipeline means more interest, more overhead and more risk—on top of the fees themselves.

NIMBY: The Soft-Cost Multiplier

On top of formal fees and schedules lies the political layer usually labeled NIMBY (“Not In My Backyard”). A joint NAHB/NMHC study found that regulation imposed by all levels of government accounts for an average of 40.6% of multifamily development costs—and that neighborhood opposition is a meaningful part of that burden.19,20 While that study focused on apartments, the same kinds of dynamics increasingly pressure single-family and for-sale communities:
  • Appeals and lawsuits over rezoning or higher-density projects
  • Demands to “down-size” planned communities, reducing lot yield
  • Pressure for more expensive architectural, landscaping or amenity standards
In metros such as Seattle, Denver’s Front Range, greater Austin and many California markets, these pressures translate into:
  • Fewer lots or units than originally planned
  • Longer timelines and more hearings
  • Higher soft costs for legal work, redesigns and new studies
From the standpoint of a builder or investor, NIMBY operates as a soft-cost multiplier on top of already high baseline fees and district taxes.

Are Cities Solving Infrastructure—or Balancing Budgets on New Homes?

None of this is to deny that cities, counties and special districts face real infrastructure challenges: aging pipes, stormwater systems, flood protection, school capacity and more. But the numbers point to a clear pattern:
  • Regulatory costs claim roughly 23–30% of new single-family home prices in many markets, with Washington now at 29.5%.1,2
  • Special purpose districts in Texas alone now account for more than $12.7 billion in property-tax revenue— nearly 16% of the statewide total.3
  • Impact fees on a single new home in Washington average about $18,432, and can be tens of thousands of dollars higher in certain jurisdictions.8
  • Multifamily projects face regulatory burdens of about 40.6% of total development cost.19
From the buyer’s perspective, impact fees often function as a prepaid property tax layered on top of ongoing annual obligations.21  From the builder’s perspective, new homes are increasingly treated as the easiest place for local government to plug budget gaps. The unavoidable conclusion is that in much of the country, new housing has become a primary source of funding for local infrastructure and services. And that reliance is one of the key reasons affordability is drifting out of reach for working households.

Strategic Moves for Builders and Their Partners

Given this environment, what can builders, developers and their capital partners do?
  1. Quantify the full municipal stack early. Before bidding on land, build a complete picture of all municipal costs, including impact fees, tap fees, district taxes, exactions, design mandates, and expected delays. Treat this as seriously as you treat lumber indexes or labor rates.
  2. Educate buyers on total cost of ownership. MUD, LID, PID and SID taxes should not be a surprise at closing. Helping buyers understand the full tax and fee overlay builds trust and directs frustration toward the system—not just the builder.
  3. Advocate for time-certain permitting. Even if fee levels remain high, predictable timelines can shave significant soft costs off every unit. Builders in states like Washington are pushing for statutory “shot clocks” on permits for precisely this reason.13
  4. Engage early on zoning and NIMBY pressure points. Treat community engagement and political risk management as core development functions, not afterthoughts. Early outreach can reduce the odds of last-minute appeals and redesigns that cripple project economics.
  5. Scrutinize special district structures. In Texas and other high-growth states, understand the long-term tax trajectory of every district—LID, MUD, PID, or SID—touching your project. Push for transparency, sunset provisions where appropriate, and alignment between infrastructure needs and tax burdens.3,4
Soft costs are no longer background noise. They are the signal. For builders, investors, and policymakers who care about long-term housing supply, confronting the “hidden tax” on housing is no longer optional.

About ML Solutions Research Group

ML Solutions Research Group provides data-driven insights on builder costs, procurement, risk, and housing policy across U.S. markets. We work with homebuilders, developers, investors, and public-sector partners to untangle the economics behind today’s affordability challenges.

My name is Mark Levinson,

Managing Partner at MLS.

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References

  1. NAHB. “Government Regulation in the Price of a New Home: 2021.”
    https://www.nahb.org/-/media/NAHB/news-and-economics/docs/housing-economics-plus/special-studies/2021/special-study-government-regulation-in-the-price-of-a-new-home-may-2021.pdf
  2. Washington Center for Housing Studies (BIAW). “The Cost of Regulations 2025.” March 22, 2025.
    https://housingstudies.biaw.com/reports/the-cost-of-regulations-2025
  3. Megan Kimble & Benjamin Wermund. “How a growing form of ‘invisible government’ is driving up Texans’ tax bills.” Houston Chronicle, Nov. 3, 2025.
    https://www.houstonchronicle.com/…/property-taxes-special-districts
  4. City of Sugar Land. “Levee Improvement Districts.”
    https://www.sugarlandtx.gov/1726/Levee-Improvement-Districts
  5. Fort Bend County Levee Improvement District No. 2. “About FBCLID 2.”
    https://www.fbclid2.com/about/
  6. HUD USER. “Impact Fees & Housing Affordability: A Guide for Practitioners.”
    https://www.huduser.gov/portal/publications/impactfees.pdf
  7. California Department of Housing & Community Development. “Fees and Exactions – Sample Analysis.”
    https://www.hcd.ca.gov/…/fees-and-exactions/docs/screen24sample1.pdf
  8. Patrick Hanks. “Impact Fees in Washington State for 2024.” Washington Center for Housing Studies, January 2025.
    https://housingstudies.biaw.com/reports/impact-fees-in-washington-state-for-2024
  9. City of Denton, Texas. “Development Fees.”
    https://www.cityofdenton.com/267/Development-Fees
  10. City of Denton, Texas. “Permit and Fee Schedule” (October 8, 2025).
    https://www.cityofdenton.com/…/Permit-and-Fee-Schedule-PDF
  11. City of Aurora, Colorado. “Development and Connection Fee Schedule – Effective January 1, 2025.”
    https://cdnsm5-hosted.civiclive.com/…/Water%20Fees%20Schedule%202025%20Final.pdf
  12. Terner Center for Housing Innovation at UC Berkeley. “It All Adds Up: The Cost of Housing Development Fees in California.” 2018.
    https://ternercenter.berkeley.edu/…/Development_Fees_Report_Final_2.pdf
  13. Washington Center for Housing Studies. “Cost of Permitting Delays in Select Jurisdictions in Washington State.” November 2022.
    https://housingstudies.biaw.com/…/cost-of-permitting-delays
  14. Seattle Department of Construction & Inspections. “2025 Fee Changes.” January 2, 2025.
    https://buildingconnections.seattle.gov/2025/01/02/2025-fee-changes/
  15. Seattle Department of Construction & Inspections. “2025 Fee Changes Summary Flyer.”
    https://www.seattle.gov/…/2025feesummary.pdf
  16. King County, Washington. “Permit fees – Building and land use.” Effective January 1, 2025.
    https://kingcounty.gov/…/permit-forms-application-materials/fees
  17. Houston Chronicle. “Conroe to revisit plan to assess impact fees for new development to help with infrastructure costs.” July 6, 2025.
    https://www.houstonchronicle.com/…/conroe-impact-fees-growth-infrastructure
  18. Beaumont Enterprise. “Beaumont could ask new developments to fund parks, water system.” 2025.
    https://www.beaumontenterprise.com/…/beaumont-boost-2026-budget-new-revenue-programs
  19. NAHB & NMHC. “Regulation: 40.6 Percent of the Cost of Multifamily Development.” 2022.
    https://eyeonhousing.org/2022/06/regulation-40-6-percent-of-the-cost-of-multifamily-development/
  20. AOBA. “New Research Shows Regulations Account for 40.6% of Apartment Development Costs.”
    https://www.aoba-metro.org/…/regulations-account-for-406-of-apartment-development-costs
  21. Vicki Been. “Impact Fees and Housing Affordability.” HUD Cityscape, Vol. 8, No. 1 (2005).
    https://www.huduser.gov/…/cityscpe/vol8num1/ch4.pdf
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