The Fiscal Impact of Development

Contents

What is Fiscal Impact?
What Affects Fiscal Impact?
Development Type
Government Capacity
Development Concentration
Implications for Local Governments
Fiscal Impact Isn't Everything

What is Fiscal Impact?
The fiscal impact of development is the effect of new investment, new construction, new employment, new population, new school enrollment and other changes on a government's budget. When new businesses start, new houses are built, and new people move into a community, local governments receive additional revenue.  The business owners and homeowners pay new property taxes.  New residents pay new local income taxes and motor vehicle taxes.  New people and businesses pay more charges, fines and fees.  But these new people and businesses also create new costs.  New businesses and housing developments may require new roads, sewers, police and fire protection.  New residents may demand new parks.  Greater traffic congestion may require more roads, traffic lights and police patrols.  More children in schools may require more teachers and even new school buildings. 

The fiscal impact of new development compares these new revenues to these new costs.  If new revenues exceed new costs, the fiscal impact is said to be positive.  The local government can more than meet new demands for services, and (perhaps) provide a tax reduction for existing taxpayers.  If new revenues fall short of new costs, however, the fiscal impact is negative.  The local government must raise taxes to meet new service demands, and (perhaps) reduce the quantity or quality of existing services.

What Affects Fiscal Impact?
Three factors appear to most influence the fiscal impact of new development: 

• Development type, whether residential, commercial or industrial;

• Existing government capacity, whether new growth can be served with existing employees and infrastructure, or new employees and infrastructure must be added;

• Development concentration, whether development is concentrated near existing infrastructure or scattered throughout the jurisdiction.

Development Type
Much research from Indiana and the U.S. implies that industrial and commercial development tend to have positive fiscal impacts, while residential development has negative fiscal impacts. Agriculture ranks between commercial/industrial and residential development.  

Professors Burchell and Listokin of Rutgers University have complied the results of a great many fiscal impact studies, and created a list of fiscal impacts by development type.    

Source:   Burchell, Robert W. and Listokin, David. "Fiscal Impact Procedures-- State of the Art: The Subset Questions of Nonresidential and Open Space Costs," The Center for Urban Policy Research: New Brunswick, NJ, 1992, p 43.

Government Capacity
Sometimes governments can provide services to new residents and businesses with existing employees and infrastructure.  School corporations may have extra classroom space.  Police departments may be able to expand patrol areas with no reduction in public safety.  Park space may be underutilized by current residents.  If extra capacity exists, the costs added by any new development are less, so fiscal impacts of any new development are more positive.  Sometimes, however, existing demands for services exceed government capacity.  If employees and infrastructure are stretched to the limit, new development of any kind may require new employees, equipment and buildings.  For example, perhaps the next new housing development will force the construction and staffing of a new fire station or new elementary school.  If no extra capacity exists, the costs added by any new development are more, so the fiscal impacts are more negative. 

Development Concentration
Much research has found that concentrated development is less costly than scattered development. Longer school bus routes increase school costs.  The added property tax revenue from widely scattered homes may not be enough to cover the maintenance costs of rural roads. More employees, vehicles and stations are needed to keep emergency response times short enough.  Furthermore, if new development is located near existing infrastructure, any existing excess capacity can be used at little additional cost.  If new development is located far from existing infrastructure, new facilities usually must be provided at higher cost.

Implications for Local Governments

·   Indiana's property tax controls restrict most civil government operating levies to 5% annual increases.  Added assessed value does not automatically increase available revenue.  Instead, governments collect the controlled levy with lower tax rates on the increased assessed value.  This reduces the fiscal advantage of commercial and industrial development over residential development in Indiana, compared to other states.

·   The property tax controls imply that service provision can more easily keep up with slower growth. With 5% in new property tax funds available each year, and inflation running at 2% to 3%, new services for annual population growth of 3% or less probably can be funded under the controls.  More rapid population growth may require diminished service quantity or quality.

·   Governments can generate new revenues from new assessed value by using tax increment finance districts (for business development only), new cumulative fund rates, or new debt, all of which are outside the property tax controls. These tools can be used for infrastructure, not for day-to-day operating funds. The Economic Development Income Tax (EDIT) can also generate funds for infrastructure.

·   Indiana allows local civil governments (not school corporations) to impose local income taxes, which increase the revenues generated by new residents. The County Option Income Tax (COIT) provides more "spendable revenue" than the County Adjusted Gross Income Tax (CAGIT).  This is because CAGIT requires some of its revenue to be used for property tax reductions. Most states do not have local income taxes, meaning that in Indiana residential development has a less negative fiscal impact than is true nationally.

·   Some counties, cities and towns generate new infrastructure revenues from impact fees, which developers must pay when new projects are constructed.  State law restricts the use of these fees.

·   Higher valued homes have less negative or more positive fiscal impacts than do lower valued homes.  Higher valued homes add somewhat more in property taxes (though this is restricted by the controls), and since higher income people tend to live in higher valued homes, they pay more in income taxes.

·   More people mean more costs.  If the number of residents per house rises, or the number of people locating in a housing development from outside the jurisdiction increases, fiscal impacts become more negative.

·  Bigger, more equipment-intensive, higher wage businesses provide more positive fiscal impacts.  Costs are more closely related to land and buildings than to equipment, yet equipment is assessed for property tax purposes.  In addition, one big firm is less costly to serve than are several smaller firms of equal assessed value, due to economies of scale and space.  Higher wage employees who locate within the jurisdiction pay more in local income taxes and may build higher valued houses.

·   Businesses that employ people who are already residents tend to have more positive fiscal impacts than those that cause new people to move into the jurisdiction. Existing residents are already being served by local governments, while new residents add new costs. 

·   Tax abatements do not reduce operating revenues.  This is because the property tax controls cause the tax rates to adjust to changes in assessed value.  With a controlled levy, an assessed value increase reduces the tax rate for existing taxpayers.  If the assessed value increase is less because of abatements, the tax rate falls less.  Tax savings are reduced, but the same property tax revenue is raised for civil unit operating budgets.  Abatements reduce the tax base available for infrastructure through tax increment financing, debt service or cumulative funds, however. 

·   For school corporations, the greater is new assessed value relative to new enrollment, the more positive will be the fiscal impact of a development.  Developments with no new enrollment almost always have positive fiscal impacts.  Since enrollment is the primary cost of school corporations, school costs escalate rapidly as enrollment increases.

·   Added revenue is more likely to cover added costs in jurisdictions that deliver services at lower cost, or in jurisdictions that deliver fewer services.

Fiscal Impact Isn’t Everything
Communities may be tempted to take a positive or negative fiscal impact as the answer to whether a development project should go forward or not.  This would be a mistake. 

Jobs and incomes are also important.  Avoiding lower value residential development because of its negative fiscal impact may make labor so scarce as to inhibit industrial development, costing the community jobs, income and possible offsetting positive fiscal impacts. 

The environment is important.  It is easy to envision a chemical waste dump with a positive fiscal impact:  lots of taxable equipment, no direct addition to school enrollment.  Deciding whether to allow such development based only on fiscal impact would miss the issues that often concern citizens the most. 

Equity is important.  Some apartments and manufactured home parks have large negative fiscal impacts.  But, many believe that lower income people should pay less in taxes, yet receive the same services as all community residents.  If so, lower valued housing must have a negative fiscal impact. 

Fiscal impact is important, but only one of the many factors communities must consider in setting development policy.