Legally, development charges are a fee, not a tax. Therefore, jurisdictions should use revenue generated from development charges to provide the infrastructure and services to serve the charge-paying real estate development. That is, the charges must meet the nexus principle, which calls for a direct relationship between the real estate project and the development charges-funded infrastructure and services. Furthermore, they must meet the rough proportionality principle. That is, they should be proportional to the cost of providing the infrastructure and services needed to serve the real estate project. When combined, the nexus and rough proportionality principles are called the rational nexus principle.

Furthermore, development charges can disproportionately burden lower-income households by negatively influencing their ability to pay (ATP), causing vertical inequity. The ATP principle undergirds vertical equity. As per this principle, the higher-income community members should pay more than the lower-income members for the publicly funded infrastructure and services. The need to promote vertical equity is even more critical in developing countries such as India. A large proportion of these nations’ population is low-income, and development charges could overburden them if the design of the charges does not consider ATP.

This chapter describes the aforementioned nexus, rough proportionality, and vertical equity issues. It also discusses other major factors to consider while designing and implementing a development charge program. These factors include the political feasibility of levying development charges and the enabling legal framework required to do so, the ways to enhance revenue yield and ensure its stability, and the institutional capacity required to levy these charges.

Nexus and rough proportionality principles and equity considerations

Two US Supreme Court cases—the Nollan and Dolan cases—form the foundation of the nexus and rough proportionality principles. These casesrequired that exactions must be related to the improvements made to a land parcel (the nexus principle) and must be roughly proportional to the improvements’ monetary impacts (Johnson 2008).

As noted in the previous chapter, in the Nollan v. California Coastal Commission (1987) case, the Nollan family requested permission to expand their house from the Commission. In turn, the Commission asked the Nollans to grant a public easement along the section of their land parcel that faces the beach. The US Supreme Court ruled in favor of the Nollans, noting that the Commission did not establish a connection (nexus) between the house’s expansion and the easement (Altshuler and Gomez-Ibanez 1993).