Fiscal Impact Analysis Creates a Win-Win for Projects and Communities

by Carlianne Patrick Crotty, CEcD, Vice President, Research and Planning, Carroll Tomorrow

Fiscal impact analysis helped Carroll Tomorrow successfully negotiate an incentive package with Decoma International, an automotive fascia manufacturer, in 2002. The completed Decoma facility is shown above.

How do you know if the benefits a new company brings to your community outweigh the costs of recruiting and servicing the company and its employees? How are you held accountable for the public funds used to lure a relocation to your community? How do you ‘draw a line in the sand’ when it comes to incentives? Is your deal a ‘win-win’ for the company and your community? Is the new tourism project a white elephant?

These are questions that all economic developers should be able to answer, but most do so based upon gut instinct or inadequate models. These models usually only examine the benefits of the project, often swelling those benefits with an inflated multiplier. If more sophisticated analysis is done, it is frequently after the deal has already been closed, when a partner college, university or other agency is employed to analyze the project. If the results show that the deal is not in the best interest of the community, it’s too late.

Fortunately, the development of local fiscal impact models has provided economic developers with an efficient and accurate way to answer those questions in-house. By analyzing projects and deals for their local fiscal impact, economic developers can negotiate more effectively on behalf of their communities, gain credibility with the public and show the return on investment to local governments.

Understanding fiscal impact analysis

To understand the value of fiscal impact analysis to the economic developer, it’s necessary first to understand what is meant by the term and how it differs from economic impact analysis. Fiscal impact analysis is meant to measure the impact of a project on local government finances, while economic impact analysis measures economic outcomes. Both economic and fiscal analysis have value for economic developers, but only fiscal analysis can help practitioners improve their negotiations with prospects and build community credibility.

Fiscal impact analysis should calculate the effect of new investment, construction, employment, population, school enrollment and other changes on a government’s budget. All fiscal impact models seek to calculate the benefits of a development or project for a local government, but not all of them calculate the associated costs. For the model to assist the economic developer during the negotiation process and help build community credibility, it must calculate both revenues and costs. Be aware that many models used by site selection consultants and companies only calculate the benefits and are used as leverage by the consultants during negotiations for incentives. Armed with information on benefits and costs, the economic developer can effectively counter this tactic.

Generally, the benefits of a project include new property taxes generated, new sales taxes generated, and the additional miscellaneous fees generated by the project during both the construction and operating periods. These benefits are calculated based on the local government’s specific tax and fee structures. Project costs are calculated based upon the particular local government’s cost of providing services related to the project, such as additional fire and police protection, increased road maintenance, public infrastructure investments, incentives and so on.

Preferably, the model also calculates the costs of servicing new households created in the community by the project. New households require education, park and library space, social services, and create other demands on the public sector, while also generating additional property taxes, sales taxes and miscellaneous fees. In order to truly understand the fiscal impact of the project, these costs and benefits should also be included in the analysis.

Besides accounting for costs, fiscal impact analysis accounts for benefits more accurately than economic impact analysis because it draws on community and project-specific data. Community data required usually include property and sales tax structure, retail activity, the local government’s budget, demographic data and basic economic activity data. Project data required usually include general facility information such as construction payroll and materials purchased, new equipment and furniture purchases, and annual operating expenses; plus employment and payroll, incentives and public investments, and property values. For tourism projects, visitor information also is required.

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