The Fiscal Impact of Residential Development

in Unincorporated Wabash Township

Larry DeBoer

Lei Zhou

Department of Agricultural Economics

Purdue University

West Lafayette, Indiana

October 1997

Summary

The Fiscal Impact of Residential Development

in Unincorporated Wabash Township

Larry DeBoer

Lei Zhou

Low and mid-priced single family housing generally has a negative fiscal impact. This means that when a family builds a new house, the extra taxes they pay are not enough to pay for the extra government services they require. Expensive single family homes generally have a positive fiscal impact. The added tax revenues due to such development equals or exceeds the added costs of services. These results are based on the study of four housing developments in Tippecanoe County, but they are consistent with the results of many other studies in other states.

This study analyzes the fiscal impacts of four residential developments in unincorporated Wabash Township, Tippecanoe County, Indiana. The developments are Capilano by the Lake, a development of expensive homes, Green Meadow and Pineview, developments with mid-priced homes, and Point West, a mobile home park. The governments studied are those of Tippecanoe County, Wabash Township and the Tippecanoe School Corporation.

The fiscal impact analysis models Indiana's property tax controls, local income tax distribution formula and state school aid formula in detail. It uses a per capita and "service standard" methods to estimate the effects on government costs. It takes account of indirect and construction impacts on the local economy. It looks at three alternate scenarios, based on assumptions about in-migration to the county and the incomes of new residents.

The development with expensive homes, Capilano by the Lake, has had a positive fiscal impact on the Tippecanoe County government under two of three scenarios, and a negative effect in a third, with a range of negative $20,000 to positive $90,000 per year. That is, the fact that these houses were built adds revenues to the county budget that may exceed added costs by up to $90,000 during each budget year. Capilano by the Lake has had a positive fiscal impact on the Tippecanoe School Corporation budget of between $40,000 to $50,000 per year, but a negative effect on the Wabash Township government, ranging from negative $130 to negative $500 per year.

The mobile home park, Point West, has had a negative fiscal impact on all three units of government. The impact on the county government ranges from negative $45,000 to negative $120,000 per year; on the township government, from negative $1,500 to negative $2,500; and on the school corporation, negative $21,000 to negative $49,000. In each case, the added costs of delivering services due to the Point West development exceeds the added revenue due to the development.

Of the two mid-priced housing developments, Green Meadow has both positive and negative impacts, depending on the scenario and government, while Pineview has a negative impact in all scenarios, for all governments. Green Meadows' range of fiscal impacts on the county government is negative $19,000 to positive $8,000 per year, while Pineview's range is negative $9,000 to negative $20,000. For the township government, the range for Green Meadow is negative $230 to negative $470 per year, and for Pineview is negative $340 to negative $570. For the school corporation, the range for Green Meadow is positive $3,800 to negative $8,200, and for Pineview negative $5,100 to negative $17,000.

County and township governments do not receive much additional property tax revenue from development in Indiana, because the state property tax controls restrict the levy (revenue collected), not the rate. Under the controls a large amount of residential construction would be needed to raise the property tax levy, and none of these developments are that large. This implies, however, that development reduces the property taxes of existing residents, because the controlled levy is raised from a larger amount of assessed value. If added to the government fiscal impacts, the tax cut effect is enough to turn most Green Meadow impacts positive. The tax cuts to individual taxpayers are tiny.

The county and township receive shares of the local income tax in Tippecanoe County. The county government receives a large share, and this is the main reason why the addition of high income residents in Capilano by the Lake created a positive fiscal impact for the county. This development's positive fiscal impact lessens to the extent that its wealthy residents were not new to the county when they moved to Capilano by the Lake.

The Tippecanoe School Corporation receives a large amount of revenue from state aid, and nothing from the local income taxes. Aid is distributed per pupil, and increases relative to property taxes when property wealth per pupil is lower. This explains why the negative fiscal impact of the mobile home park, Point West, is relatively small for the school corporation compared to the impact on the county. Because it receives no income taxes, the relatively low incomes of Point West residents are not a disadvantage for the school corporation. And because state aid offsets low property wealth, Point West pupils generate almost as much revenue as Capilano by the Lake pupils.

These fiscal impact results are similar to those found in past studies in other states. Many other studies show residential development with negative fiscal impacts. Higher priced single family homes have had a positive fiscal impact, especially on schools, and mobile home parks have had the largest negative fiscal impact of any land use. Office parks and industrial development tend to have positive fiscal impacts.

Negative fiscal impacts are in part boundary problems. Business and residential development often occur simultaneously. New people attract new businesses to meet consumer demands; new businesses attract new people to fill new jobs. Isolating the negative fiscal impact of residential development can be misleading, if business development with a positive fiscal impact accompanies it. This may be especially true for the county, where business and residential development both take place within county boundaries. If the bulk of business development takes place outside a jurisdiction's boundaries, however, the negative fiscal impact of residential development would not be offset. This may be the case for the school corporation and township governments.

The fairness of these fiscal impacts depends on one's opinion on what makes taxes fair. There are two views of tax fairness. The benefit view sees taxes as fair when people pay enough to finance the government services they use. The ability to pay view sees taxes as fair when upper income people pay more than lower income people. Negative (and positive) fiscal impacts are unfair from the benefit point of view. People are receiving services which their taxes do not support. Fiscal impacts that are positive for upper income people and negative for lower income people are fair from the ability to pay point of view. Providing equal access to public services regardless of income, and charging taxes based on ability to pay, will generally produce positive fiscal impacts for upper income housing developments, and negative fiscal impacts for lower income housing developments.

Finally, policy makers and citizens should be reminded that a development's fiscal impact is just one of the factors to consider in land use policy. Among others, economic, environmental, aesthetic and equity effects must also be considered.

This study was funded by the Kinley Trust, administered by Purdue University.

Introduction

When a family builds and moves into a new house, are the extra taxes they pay enough to finance the extra government services they require? The family will pay new property taxes on the house, new excise taxes on their cars, and new local income taxes. The state school aid formula will allocate additional aid if the family sends children to local schools. Other taxes, charges, fees, and state grants may also increase. But a new family will create new government service requirements. Most costly is educating the family's children in the public schools. In addition, the family and their house may require added police and fire protection, new roads, added park and recreation space, and many other services.

This study analyzes the impacts of four residential developments in unincorporated Wabash Township on local government revenues and costs. The developments are Capilano by the Lake, a development of expensive homes, Green Meadow and Pineview, developments with mid-priced homes, and Point West, a mobile home park. The governments studied are those of Tippecanoe County, Wabash Township and the Tippecanoe School Corporation.

The first section of this report offers details about the housing developments, based mostly on data from property tax assessment and school enrollment records. Other economic and demographic characteristics of the developments are estimated. The second section reports the method used to estimate revenue impacts, focusing especially on Indiana's property tax controls, distribution methods for local income taxes, and the state school aid formula. The third section offers details about the cost impact estimates. The forth section subtracts costs from revenues to show fiscal impacts, and discusses the reasons behind the results. The fifth section summarizes the results and offers some interpretations.

This study was funded by the Kinley Trust, administered by Purdue University.

Property, Population and Pupils

Four Residential Developments

Different kinds of residential developments may have different fiscal impacts. For this reason four unincorporated Wabash Township residential developments with different characteristics were selected for analysis: Capilano by the Lake, Green Meadow, Pineview and Point West. Capilano by the Lake consists of relatively expensive single-family homes with four or more bedrooms. Houses in the Green Meadow community are mostly medium priced single-family homes with three to four bedrooms. Pineview is a residential development with mostly more moderately priced homes and three to four bedrooms. Point West is a mobile home park, with about 380 mobile homes and a few permanent structures. Capilano by the Lake, Green Meadow, and Pineview were developments begun after 1990. The Point West mobile home park is older.

Table 1 compares the property assessments of homes in these four developments.

Table 1

Assessed Values of Homes in Four Residential Developments

	Capilano by the Lake	Green Meadow	Pineview	Point West
No. of Parcels	56	56	71	387
No. of Houses	46	52	66	377
Total AV	$3,853,500	$1,668,700	$1,347,250	$1,389,820
AV per Parcel	$68,813	$29,798	$18,975	$3,687
Total Deductions	$124,000	$154,000	$185,000	$0
AV w/o Develop.	$11,200	$5,600	$5,600	$7,308
Net Increase in AV	$3,718,300	$1,509,100	$1,156,650	$1,382,512

Source: Tippecanoe County Auditor's data base.

The number of parcels shown in Table 1 include both developed and undeveloped lots. The number of houses includes only lots that have been developed. Total assessed value (AV) is the sum of the assessments of all land and structures, including the values of mobile homes. Assessed value per parcel is the average assessment per lot. Total deductions are the sum of homeowner deductions from assessed value, primarily the mortgage and standard deductions, at $1,000 and $2,000 per home, respectively. The assessed value without development is the total assessed value of the land if it were undeveloped and assessed as farm land. The net increase in assessed value is total assessed value less deductions, less the assessed value without development.

The fiscal impact estimates require information on other features of these housing developments and their residents, such as the number of residents, housing market values and family incomes. Fortunately, methods exist to estimate these numbers, without the expense of a family by family survey. These methods have been developed in part because fiscal impact analysis is often applied to planned residential developments, rather than existing developments.

Table 2 shows these estimates. Market value is estimated by assuming that assessed value is 21% of market value. This percentage is based on the average assessment to market value ratio found by Indiana Fair Market Value Study (Indiana State Board of Tax Commissioners, 1996). The per parcel average market values are reasonably close to advertised prices for houses currently for sale in these neighborhoods. Six Capilano by the Lake homes for sale in Summer and Fall 1997 listed for between $388,500 and $495,000, so the Capilano market value estimate of about $327,678 per parcel may be a bit low. Five Green Meadows houses in the section currently being developed listed for $139,900 to $159,000, so the estimate in Table 2 of $141,896 appears to be accurate. Two Pineview Farms houses listed for $98,500 and $169,900. The second house is one of the larger houses in the development, the first has a price closer to the $90,358 estimate in Table 2. One listing for a 1995 model mobile home in Point West was found, for $21,900. The estimate in Table 2 of $17,554 is not far from this value.

Table 2

Income and Demographic Information for Four Residential Developments

	Capilano by the Lake	Green Meadow	Pineview	Point West
Total Market Value	$18,350,000	$7,946,190	$6,415,476	$6,618,190
Market Value per Parcel	$327,678	$141,896	$90,358	$17,554
Total Household Income	$14,548,643	$5,273,757	$3,390,960	$8,535,031
Average Household Income, residents	$316,275	$101,418	$51,378	$20,756
Average Household Income, county	$41,512	$41,512	$41,512	$41,512
No. of residents	190	193	218	896
No. of School age children	36	52	55	124
Average Vehicles per Household	2.5	2.4	2.1	1.6
Average Age per Vehicle (years)	5.0	5.6	7.0	8.7
Average Original Value per Vehicle	$12,206	$11,554	$10,952	$10,271

There is, of course, a broad relationship between the values of homes families own and family income. Higher income people tend to own higher priced homes. Several studies provide data on the relationship between incomes and housing values. One such is by the Federal Reserve Board (1997), which surveyed families nationwide. A statistical procedure called regression was used to relate incomes to house values in an equation:

Household income = -37,000 + 0.93 x House Value.

This implies, for example, that the average family in a $100,000 house has an income of $56,000 (100,000 x .93 = 93,000; 93,000 - 37,000 = 56,000). We tested this equation on 1990 Census values for Tippecanoe County. According to the U.S. Census Bureau, houses sold in Tippecanoe County in 1990 had an average price of $66,000. This implies household income of $24,380, according to the formula. The actual average family income in the county was $27,630, a difference of 12%, reasonably close for our purposes. The formula yields a negative income for residents of Point West, which is of course not possible. Instead, it was assumed that Point West households had incomes half the estimated county median household income. Median household income is estimated by increasing the Census 1989 figure by the percent increase in county per capita income estimated by the Bureau of Economic Analysis. The 1989 figure is $27,630; the 1997 estimate is $41,512. This puts the Point West estimate at $20,756. To test the effects of different income assumptions, one fiscal impact scenario assumes that all new households have the average county household income.

The total number of residents in each development are estimated using demographic multipliers from the U.S. Census, which list the average number of residents for different house types and regions. For example, the Pineview housing project in the Wabash Township are mostly three and four bedroom single family houses. The average number of people living in a four bedroom single family house in the East North Central area (which includes Indiana, Illinois, Michigan, Ohio and Wisconsin) is 3.308. The number of houses in the housing project is 66. Hence, it is estimated that the Pineview housing project has a population of 218 residents (3.308 times 66).

The Tippecanoe County School Corporation keeps data on the number of pupils and their locations for transportation purposes. The numbers of school children shown in Table 2 are the school corporation's pupil counts.

Indiana imposes a motor vehicle excise tax based on the original value and age of cars, motorcycles and light trucks. Estimates of the number, age and original value of vehicles are made based on data from the U.S. Department of Energy (1997) and the Federal Reserve Board (1997). For example, for households with incomes between $25,000 and $50,000, the Federal Reserve estimates the total value of vehicles at $7,800, and the Department of Energy estimates 1.9 vehicles averaging between 7 and 8 years old. Assuming straight line depreciation over 12 years puts the original value of each vehicle at $10,900.

Where Did Residents Come From?

Not every resident of these housing developments came to Tippecanoe County from elsewhere when their new houses were built. Many--perhaps most--moved to their present houses from other houses in the county. While the houses (and their assessed values) are undoubtedly new, the families and their school children may have been demanding services in the county before they moved to their new houses, and the county may have been taxing their incomes and automobiles already. It may not be correct to assume that all of these families' service demands and tax payments are net additions to the county.

However, an examination of Indiana counties in the 1980s shows that for counties of Tippecanoe's size, the increase in county population corresponds to the number of new houses built times the average county household size (DeBoer, 1997). In other words, new houses do appear to represent new county residents. To test the effect of in-migration, however, we report a scenario based on the assumption that only 70 percent of new residents are in-migrants. This is the percentage found for counties smaller than Tippecanoe.

The in-migration question also affects income estimates. Even if each new house represents a new family migrating into the county, the residents of the new developments may not themselves be in-migrants. A high income family moving into Capilano by the Lake may have vacated a house of lesser value in Tippecanoe County, which was sold to a family with a lower income. If that family came from out-of-county, the net addition to county income would be less than the Capilano family's income.

To test the effect of this possibility, a fiscal impact analysis is done assuming that new residents have the county average household income. This latter assumption makes sense if the county's new residents moved into houses vacated by those moving into unincorporated Wabash Township. Both of these alternate scenarios--that 70 percent of residents are in-migrants, and that all new residents have the average county income--are compared to a scenario with 100 percent of residents assumed to be in-migrants, and assuming that the in-migrants have the incomes of the new residents of the four developments.

Indirect Impact

New residential development generates economic activity beyond its direct effects. New residents create new demands for goods and services. Existing businesses may expand to meet these demands, and new firms may locate within the community. This new business development adds to assessed value. It creates more jobs for more employees, who in turn may contract to build new houses. This also adds to assessed value beyond the amount of the initial residential development. New employees will also pay added income taxes, motor vehicle excise taxes and charges and fees. This indirect, additional impact on the local economy is often called the "multiplier effect."

Some of the land on which these developments were built was farm land. Crops were grown, harvested and sold, and the income spent by the farmer. As this land is now residential, this income is no longer generated. Thus, it must be subtracted from the income generated by the spending of new residents. This income is estimated by multiplying estimated acreage by a five-year average corn yield and five-year average corn price. Acreage is estimated by dividing the pre-development assessed value of the land by the base rate assessed value of a farm acre, $165. Note that the base rate true tax value is $495 per acre--a more familiar figure--but that assessed value is true tax value divided by three.

The indirect income effects of net additional spending are estimated using an "input-output model" (Minnesota Implan Group, 1993). This is a model of the Tippecanoe County economy which shows links between consumer spending and business activity. From this model come "multipliers," showing how much added income is produced by one dollar of new consumer spending. This income multiplier for Tippecanoe County is estimated to be 0.5, meaning each one dollar of new spending by new residents generates an additional 50 cents of income through added local business and jobs.

For example, residents of the Green Meadow development are estimated to have $5,273,757 in total income. On average, about 35% of this is paid in taxes (Tax Foundation, 1994), so 65% remains to be spent. On average, about 80% of spending by local residents is done inside Tippecanoe County, with the remainder spent elsewhere. This implies that 52% of new resident incomes are spent inside the county. Using the above multiplier, this added spending creates $1,371,176 in additional income. In other words, spending by the residents of this development created new jobs and raised pay of existing jobs, increasing income by almost $1.4 million in total.

It is necessary to project the increase in the number of households and population that this income increase represents. Between 1987 and 1996, on average each one percent increase in Tippecanoe County total income has corresponded to a 0.15 percent increase in population and a 0.85 percent increase in per capita income. Increases in income result mostly in increases in incomes per person of existing residents, less in increases in population. Tippecanoe County's total income was about $2.9 billion in 1996. An additional $1.4 million from the Green Meadow development is a 0.05% income increase. Of this increase, 0.007% is estimated to be from added population. With Tippecanoe's population estimated at about 139,000 in 1996, this implies an increase of 10 people. About 13% of Tippecanoe County's population are public school pupils, implying slightly more than one extra pupil for the schools. Of course, the indirect addition to economic activity is county-wide--the new retailers created by Green Meadow spending may locate in downtown Lafayette, for example, and their new employees may live in West Lafayette. So not all of the new students will reside in the Tippecanoe County School Corporation. We suppose that the new households will distribute across the school corporations in the same way as existing households. Of county students, 47% are enrolled in the Tippecanoe School Corporation. Thus, the indirect impact of Green Meadow development would add about half a student to the Tippecanoe County School Corporation.

Over the 1972-96 period, each one percent rise in Tippecanoe County income has corresponded to a 0.47 percent rise in assessed value, after eliminating the effects of reassessment. The 0.05% increase in income from the Green Meadow indirect impact should raise assessed value 0.022 percent. In 1996 total county assessed value was $1,241 million. Assessed value is estimated to rise by $277 thousand as a result of the Green Meadow indirect impact.

Construction Impact

During the construction phase of the new housing project, construction activity creates demands for building materials, fixtures and appliances. Construction workers will demand retail goods and services. This spending will create more local jobs and incomes, but his part of indirect impact lasts only for the construction period. Once the houses are built, the spending by construction firms and workers can no longer be attributed to a particular development project. While it is being built, however, we attribute the added taxes paid by firms and workers, and added service demands, to the development.

As with the indirect impact of residents, the impact of construction is measured using an input-output model and its multipliers. The construction multiplier shows the additional local income created by each dollar spent on construction. The construction multiplier for Tippecanoe County is 0.32. We estimate that construction expenditures equal 95% of market value, subtracting an amount for construction company profits, with firm rates of return estimated by the six-month Treasury bill interest rate for 1996. The justification for this measure of profits is the idea that firms will invest in housing construction only if their rate of return at least matches what they can get from other investments over the same time period. If construction rates of return are greater than what can be had from other investments, more houses will be built and the rate of return forced down. Assuming a construction period of about six months, a six month interest rate should approximate the profit rates for construction firms. For example, Pineview market value is estimated to be $6,440,714, construction spending is 95% of this figure, and using the construction multiplier the added income for local residents is $1,957,977, in the year of construction. This added income translates into new spending, population, enrollment and assessed value as described above.

Revenue

We analyze the revenues of local governments in Tippecanoe County in five parts: 1) property taxes, 2) local income taxes, 3) motor vehicle excise taxes, 4) state aid and 5) other charges, fees and revenues, including interest and other taxes.

Property Tax. The property tax is the most important source of revenue for local government in Tippecanoe County, accounting for 50% of total revenue in 1997. Almost all local governments collect property taxes. Property taxes are imposed on both real and personal property. Real property consists of land and improvements on land, such as houses, factories, and barns. Personal property is almost entirely business, farm and utility equipment and inventories.

Unlike other taxes, the property tax rate is determined as a residual. This means that instead of a predetermined tax rate, the property tax rate is set to collect a particular amount of revenue for a local government, given the assessed value of property within its borders. In Indiana, the amount of revenue local governments can collect from the property tax is largely determined by state property tax controls.

Local Income Taxes. Local governments in Indiana can choose from three different local income taxes: the County Adjusted Gross Income Tax (CAGIT), the County Option Income Tax (COIT) and the County Economic Development Income Tax (CEDIT). These taxes were created to provide property tax relief and to provide alternative sources of revenue for local governments. In Tippecanoe County, COIT and CEDIT account for about 10% of the total revenues for local governments. All non-school (civil) governments share in COIT revenue, which is imposed at a 0.6% rate. The CEDIT rate is 0.65%. Revenue from the first 0.40% goes to the county, cities and towns. Revenue from the remaining 0.25% goes to the county's landfill closure fund. All but this last share of local income tax revenues are distributed to local government units in proportion to each unit's share in the total property tax levy of recipient units.

Motor Vehicle Excise Tax. Next to the property and local income taxes, the motor vehicle excise tax on automobiles, motorcycles and light trucks is the largest source of tax revenue for local governments, accounting for about 4% of revenues countywide. Tax rates range from $12 to $530 per vehicle depending on age and original value. All units of local government including school corporations receive motor vehicle excise taxes, roughly in proportion to their share in property tax collections.

State Aid. Two major state aid programs affecting local governments are aid for highway, road and street construction and maintenance paid to the county, cities and towns, and tuition support paid to school corporations. This study ignores state highway aid. These funds are raised statewide primarily from the gasoline tax and distributed by formula. In preliminary calculations, we estimated that each $100 in extra gasoline tax paid by new Tippecanoe residents would increase county highway aid by only 55 cents. And this figure is generous, in that it assumes that all new residents come not just from out-of-county, but from out-of-state, making their gasoline tax payments net additions to state revenue. The effect of residential development on county, city and town highway aid can be safely ignored.

Not so school aid. State tuition support funds are raised from general state revenue sources, such as the state individual income tax, sales tax and corporate income taxes. It is distributed by formula on a per-pupil basis. Increases in school enrollment increase aid. The aid formula generally provides more funds to school corporations with less assessed value per pupil, and less aid to those with more assessed value per pupil. Thus, changes in assessed values and enrollment can alter the mix of aid and property taxes in school expenditures. The three school corporations in Tippecanoe County receive about 37% of their revenue from state aid.

Charges, Fees and Other Revenues. For Tippecanoe County governments as a whole, charges, fees and other revenues account for about 8% of total revenue. There are a large variety of such revenues, including, for example, interest on investments, charges, fines and fees collected by the courts and county recorder, revenues from concession stands and golf courses, trash collection fees and charges for fire protection contracts.

Estimation of Additional Property Tax Revenue

Projection of additional property tax revenue is divided into three parts: added revenue for operating funds, which are subject to state maximum levy property tax controls, added revenue for cumulative funds, which are subject to state tax rate controls, and added revenue for debt service. Debt service revenues are not subject to state property tax controls, though there is state oversight on bond issues, and tax rates and levies are set to meet the debt repayment schedule.

Operating Fund Levies. Property taxes used for operating purposes in Indiana are subject to state maximum levy controls. The maximum levy which local non-school governments are allowed to raise is increased annually based on a three-year rolling average of percentage growth in assessed value, excluding reassessment years. If this three year average is less than five percent (as it is in 90% of Indiana jurisdictions each year), the local unit can raise its maximum levy by five percent. If the three year average is greater than ten percent, the local unit can raise its maximum levy by ten percent. If the three year average is between five and ten percent, the local unit may raise its maximum levy by that percentage. Almost all local units of government tax at or very near their maximum levies, so limits on the maximum levies are usually limits on actual taxes collected.

Because of these maximum levy controls, increases in assessed value may reduce property tax rates rather than increase property tax revenue. If the added development is not enough to push the three year assessment growth average above five percent, it has no effect on a unit's maximum levy, and hence no effect on property tax revenue for operating purposes. In this analysis, the maximum levy is calculated with and without the assessed value from each residential development. The difference between the two levies shows the impact of residential development on property tax revenues for operating purposes.

The county government's three year average assessed value increase, excluding the recent reassessment year, is 0.9%. This is well below the five percent threshold, and no single residential development can come near to raising it above five percent. The Capilano by the Lake development, for example, added in total $3,718,300 in net assessed value over several years in the 1990s. Even if this figure is counted in a single year, it is only three-tenths of one percent of county assessed value. New residential construction in the 1990s has not increased assessed value enough to reach the five percent minimum, so the county's maximum levy has not been affected by residential construction. Instead, the county tax rate has been reduced, because the same levy is being raised on a larger assessed value base. Capilano by the Lake development has reduced the county's tax rate by about $0.0026 per $100 assessed value, which amounts to $32,621 in tax reductions for county taxpayers (see Table 16, below).

Cumulative Fund Levies. Cumulative fund property taxes are subject to specific tax rate limits. For example, the cumulative bridge fund rate for Tippecanoe County is $0.2643 per $100 assessed value. This rate is assumed to be fixed, regardless of increase or decrease in assessed value, though the maximum cumulative bridge fund rate is $0.30 per $100, so there is a little room for increase. Additional cumulative property tax revenue is simply the product of the cumulative fund tax rate and the increase in net assessed value resulting from development. For example, the Capilano by the Lake development has a net increase in assessed value of $3,718,300. Given the cumulative bridge fund rate for Tippecanoe County, this development generates $9,827 in added tax revenue.

Debt Service Fund Levies. The property tax rate for debt service in Indiana is not subject to tax rate control, though there is state oversight over bond issues and there is a constitutional debt limit (this limit is not applicable to many of the bonds that are issued). But debt service property taxes are raised to make the current payment on a multi-year debt schedule. As assessed value changes, the debt service tax rate changes to raise enough to pay the current payment. An increase in assessed value allows a cut in the tax rate instead of an increase in revenue collected. For example, Wabash Township has a debt service tax rate of $0.0344 per $100 assessed value. Without the Capilano by the Lake development, this rate would be $0.0349. The $0.0005 reduction in the rate saved existing resident taxpayers $1,279.

Estimation of Additional Local Income Tax Revenue

There are two differences between the analysis of the property and local income taxes. First, the property tax varies year to year, with much of the tax levy fixed by state controls. The income tax has fixed rates, so revenue varies with changes in taxable income. Development usually decreases property tax rates, but it will increase income tax revenue. Second, the property tax is imposed by local units on property within their boundaries, and the revenue collected on this property goes to the local unit. The income tax is administered by the state, imposed and collected countywide, and distributed to local units based on shares in the property tax levy. Thus, while additional property tax revenue and tax rate cuts from development benefit only the local units which have jurisdiction over the development, added local income tax revenue is distributed to all non-school units of government in the county, whether the development is within the units' jurisdiction or not.

For example, the Pineview development is located in Wabash Township, the Tippecanoe School Corporation, the Tippecanoe Library District and Tippecanoe County. All additional property tax revenues and tax cuts derived from the Pineview development go to these four units. But additional local income tax revenue from families in Pineview is collected countywide, and is distributed to all non-school units (COIT) or the county, and all cities and towns (CEDIT), based on shares in the property tax levy. Units such as the cities of Lafayette and West Lafayette, the town of Battleground and the Greater Lafayette Transportation District will receive added income tax revenue from the Pineview development, though it is outside their boundaries.

COIT. The County Option Income Tax (COIT) rate is 0.6 percent in Tippecanoe County. The product of this tax rate and the total added taxable household income of new residents is the addition to COIT revenue for the whole county. We assume that households take the Indiana personal deduction of $1,000 per person. Part of COIT revenue is used to offset the addition to the homestead credit adopted in Tippecanoe County. This is eight percent of the assessed value of eligible homes, effectively reducing the tax rate on homes in the county. The revenue lost from this tax cut is replaced from revenue collected from COIT, before the remainder is distributed to local units.

The amount of income to be distributed, then, is the COIT rate times taxable income less deductions of new residents, less the amount needed to replace the revenue lost because of homestead credits on the new homes. Local unit shares of COIT revenue are based on the percent of each units' property tax levy in total non-school property taxes. Thus, for every $100 increase in COIT distributable revenue, Tippecanoe County receives $45.16 and Wabash Township 30 cents.

CEDIT. The County Economic Development Income Tax (CEDIT) tax rate is 0.65 percent. CEDIT is similar to COIT except for two features. First, CEDIT revenue is not used to offset the homestead credit. All revenues from CEDIT are distributed to local governments. Second, while all non-school units receive COIT revenue, only the county, cities and towns receive CEDIT revenue. Tippecanoe County is unique among Indiana counties in having a CEDIT rate above the level usually allowed. Other counties with both COIT and CEDIT have a rate limit of one percent; Tippecanoe County taxes at 1.25%. The extra 0.25% rate provides revenue to the county only, for the landfill closure fund. Local unit shares of the remaining 0.40% are based on the percent of the property tax levy in total county, city and town levies. For every $100 increase in CEDIT revenue, Tippecanoe County receives $49.63 from the 0.40% rate, while Wabash Township receives nothing.

Estimation of Additional Motor Vehicle Excise Tax Revenue

Indiana imposes a motor vehicle excise tax on automobiles, light trucks and motorcycles according to the age and original price of the vehicle. Estimates are made of the number of vehicles, original value and age of vehicles for families in each development. For example, in Pineview it is estimated that the average family owns 2.1 vehicles, averaging 7 years old, with a value when new of $10,952. The motor vehicle excise tax rate chart shows the payment on such a car to be $52; with 2.1 cars the households total payment would be $109.

Summing all households in the development gives the total excise tax paid. The additional motor vehicle excise tax is then distributed to each local unit based on the shares of each unit's property tax rate in the total property tax rate applied to property in unincorporated Wabash Township. Thus, the county, township, Tippecanoe School Corporation and Tippecanoe Library District receive excise tax revenues. For Pineview, the direct effect of development is estimated to add $8,075 to excise tax revenue. Of this, 25% goes to the county, 2% to the township and 70% to the school corporation.

Estimation of Additional Charges, Fees and Other Revenue

We assume that charges, fees and other revenues are linked to population, since more people in a community will pay more charges and fees to local governments. For example, $24 per capita in charges and fees are paid to Tippecanoe County. With 218 new residents associated with the Pineview development, charges and fees for the county are estimated to have increased $5,232.

School Corporation Property Taxes and State Aid

Added school corporation revenues are estimated on a different basis than civil government revenues, mainly because state school aid is such a large part of revenue. In 1997, the Tippecanoe School Corporation received 53% of its revenue from property taxes, 40% from state aid, and 7% from other sources including the motor vehicle excise tax, financial institutions tax, federal aid and charges and fees. School corporation budgets are divided into four major funds: the general fund, the capital projects fund, the transportation fund and the debt service fund. In the Tippecanoe School Corporation, the general fund accounts for 69% of appropriations. The remaining three funds account for 31%.

The General Fund. The general fund is the largest of the school funds, and it is financed by the property tax and the bulk of the state aid which the corporation receives. The mix between property tax revenue and state aid is determined by the state aid funding formula. This formula is usually revised by the General Assembly during budget years (the "long sessions" in odd numbered years). The formula modeled here was passed by the 1995 General Assembly for the 1995-96 and 1996-97 state fiscal years.

A simple version of state school aid formulas used by most states may be helpful in understanding Indiana's formula. The simple formula is

State School Aid per pupil = Target Spending per pupil - (Target Tax Rate x Assessed Value per pupil).

School aid is set to "fill in the difference" between what the state thinks the school corporation should spend per pupil (target spending) and the amount the school corporation could raise from its tax base (assessed value) using a particular tax rate (target tax rate). The larger is the local tax base, the smaller state school aid is likely to be, and the smaller the tax base, the larger is school aid. One purpose of formulas such as this is to offset or "equalize" differences in per pupil wealth, so that spending per pupil does not fully reflect the large differences in wealth per pupil among the state's school corporations.

Indiana's formula has six main steps: 1) target spending calculation, 2) target tax rate calculation, 3) actual tax rate calculation, 4) local revenue calculation, 5) state support calculation and 6) total spending calculation.

Target spending is the amount per pupil (or per ADM, average daily membership) which the school corporation can spend. Total spending is this figure times enrollment, the total number of pupils. Target spending is based on the previous year's target, adjusted for changes in enrollment and other provisions. The legislature sets a minimum spending level per pupil which the formula will guarantee to the school corporation.

The target tax rate is calculated based on the target spending level and the "reward for effort" chart. This chart sets the amount of aid that each corporation will receive for each penny of local tax effort, that is, for each penny of local property tax rate per $100 assessed value. One way Indiana's formula differs from the simple formula above is that the target tax rate and the target spending level are linked. The larger is the target rate, the larger is target spending. This is done so that each extra dollar of local effort (rate times assessed value) will not decrease state aid by a full dollar. Instead, state aid is reduced by less than a dollar when local effort goes up, so that target spending goes up. This is the "reward for effort."

The actual tax rate may differ from the target rate, however. When the first version of the current formula was devised in 1993, actual tax rates for many school corporations were much lower than the target tax rates. Moving from actual to target all at once would have meant large property tax increases, which the General Assembly decided not to allow. Instead, they limited the amount the actual rate could increase while approaching the target rate. In the 1995-97 formula, the rate increase was limited to five cents per year. If the school corporation's actual rate matches its target rate, it is said to be "on chart."

Total local revenue is the actual tax rate times assessed value. In addition, the school corporation receives other local revenue, from the motor vehicle excise tax, financial institutions tax, and other sources.

State aid consists of state tuition support and other state support. Tuition support is calculated by the formula, as the difference between target spending and local revenue (from property taxes and other sources). Other state aid consists of at-risk funding, the enrollment adjustment grant, vocational education funding and special education funding.

Finally, total spending is the sum of local revenue and state aid.

The impact of residential development on school general fund spending is estimated by comparing state aid, local revenue and total spending with no residential development to the formula results with actual development.

Other School Funds. The tax rate for the capital projects fund is subject to a state maximum rate limit; the tax rate for the transportation fund has no limit; and the tax rate on the school debt service fund adjusts to raise what is needed to pay the annual debt service. Thus, for the capital projects and transportation funds, the impact of development can be found by multiplying the funds' tax rates by the net increase in assessed value. For the debt service fund, any increase in assessed value will cut the tax rate required to raise the debt service payment.

Other School Corporation Revenue

Property taxes and state aid account for 93% of Tippecanoe School Corporation revenue. Another 6% is derived from the motor vehicle excise tax. The calculation of this revenue is the same as for non-school governments, described above. The remaining one percent of revenue is primarily from the financial institutions tax, federal aid and charges and fees. These are estimated on a per pupil basis. For example, Tippecanoe School Corporation federal aid was $7 per pupil in 1997. We assume that additional new students will receive the same amount of Federal aid per pupil as existing students. The same method is applied to other revenues.

Costs

Costs for Non-School Governments

This study uses the per capita method to calculate costs for non-school governments. Total local government appropriations are divided by the number of residents to give per capita local government appropriations. Adjustments are made for fixed costs and other costs not affected by residential development. Then the resulting per capita figures are multiplied by the direct and indirect increase in population resulting from development, to estimate the impact of development on costs.

The per capita appropriation for the Tippecanoe County government is $288 per person, and for the Wabash Township government, $3.92 per person. However, some local government expenditures are fixed costs, unlikely to be influenced by residential development. Salaries of county commissioners, for example, are likely to remain the same (or increase on a regular schedule year after year) regardless of development. Other expenditures unlikely to be affected by new development are poor relief and welfare spending. This is because new development is generally a sign of an improving economy, which if anything ought to decrease requirements for poor relief and welfare. After removing fixed costs and poor relief/welfare, Tippecanoe County per capita expenditure is $248, and Wabash Township per capita expenditure is $2.82. For example, the direct addition to population by the Pineview project is 218, which is estimated to increase total appropriations in Tippecanoe County by $54,064 ($248 x 218).

An advantage of the average cost method is that it is easy to use and easy to explain. However, it is of course very simple, and might be criticized as missing an important factor in costs, the capacity of current public facilities. A park or sheriff's department may have "excess capacity", meaning it has people or facilities that are not fully utilized. The added service demands from development could then be met with existing people and facilities, without the costs of hiring new people or buying new equipment. Per capita costs would decline. Or, current public facilities may be at or beyond capacity, so that one more development will require big investments in sheriff's stations, patrol cars, and new officers.

An example is the Wabash Township volunteer fire department, which serves the unincorporated part of the township. There was much residential development in the township during the 1990s--Capilano by the Lake, Pineview and the new section of Green Meadows have all been built in this decade. In 1990 the department was a volunteer department with a budget similar to what it is today. In a sense, then, these new developments had no impact on fire department costs. The department must have had excess capacity, in that volunteers had the ability to make more runs, as evidenced by the fact that today they do make more runs. The per capita cost method overstates development's effects on township costs, compared to this "capacity" method.

However, township fire department officials speculate that future residential development may require the fire department to purchase new equipment and hire professional firefighters. In 1996 the volunteer department made 348 runs; in 1997 the number may be more than 400. Thirty-four of these runs were to the four developments considered here, 10 percent of the total. The residential development so far in the 1990s has not had a cost impact, but they have had an impact on the work load of the volunteers. Possibly the volunteers are near their capacity, so that development during the rest of the decade may have an impact on costs.

Future development differs from past development only in its timing--it will come later. The capacity method will attribute none of the added costs to the earlier development, and all of the added costs to the later development. But if what is wanted is to make more general statements about the fiscal impact of housing development, timing shouldn't matter, and the per capita method is more appropriate.

A second argument for using the per capita method is that per capita appropriations by Tippecanoe County local governments have not changed significantly during the 1990s. Table 3 compares total and general fund per capita appropriations in 1992 and 1996. Of course, inflation has pushed appropriations higher, so the table shows 1996 figures "deflated" using the state and local purchases deflator from the National Income and Product Accounts. The deflated figures show what per capita appropriations would have been had prices remained at their 1992 levels through 1996. If a local unit has excess capacity, costs do not rise with population and per capita spending falls. If a local unit has no excess capacity, or is over capacity, costs will rise with population and per capita spending will remain stable or rise.

Table 3

Per Capita Appropriations, Tippecanoe County Governments

Jurisdictions	Total Appropriations			General Fund Appropriations
	1992	1996, deflated	Percent Change	1992	1996, deflated	Percent Change
County	$223	$254	13.7%	$109	$119	9.1%
All Townships	$12	$13	8.3%	$2	$2	4.5%
All Cities/Towns	$268	$265	-0.9%	$144	$147	2.2%
All School Corps.	$711	$733	3.2%	$527	$534	1.2%
All Other	$50	$46	-7.9%	$21	$19	-6.6%
TOTAL	$1,263	$1,311	3.8%	$803	$821	2.3%
Exhibit: Population	132,104	138,839	5.1%

Source: Indiana Local Government Data Base, local government budget forms; U.S. Bureau of Economic Analysis population estimates.

County, total township and total school corporation appropriations per capita have all increased during the 1992-96 period, even after allowing for inflation. The total for all local governments has also risen, but by only 3.8% over four years--less than one percent per year. Of course, other factors besides development are affecting appropriations levels. But had per capita appropriations been declining during a time of rising population, it would have cast doubt on the per capita method. As it stands, however, per capita appropriations are increasing, which may imply that Tippecanoe County local government facilities are at capacity. It also may imply that, if anything, the per capita method understates the cost impact of population growth, by assuming constant per capita appropriations as population grows.

Cost Estimates for the School Corporation

The school corporation provides only one service to local residents­public education­and this allows a more detailed analysis of the impact of development on school costs. The method uses "service standards," essentially showing the level of added spending needed to maintain current class sizes and facility square footage per pupil as enrollment rises.

The service standard for teaching is based on the average class size, or the pupil-teacher ratio. The current pupil-teacher ratio in the Tippecanoe County School Corporation is 16.55, 8,552 pupils divided by 515 teachers. No claim is made here that this is the optimal ratio, but we do assume that the school corporation adds teachers to prevent this ratio from rising with new enrollment.

Another source of school costs is capital expenditures, in classrooms, gymnasiums, playgrounds and so forth. Our fiscal impact model measures facilities by square foot per pupil. Recently, the state legislature created a School Construction Benchmarks Committee to determine state standards for school construction. This committee recommended that school facilities provide 150 square feet per pupil. The committee also determined that the average cost per square foot is $100 (Indiana Tax Watch, 1995). These two figures are used as the capital facilities service standard in this analysis.

Other school costs include transportation, supplies and equipment, utilities, building maintenance and others. The school corporation spends $460 per pupil on transportation, and $1,948 per pupil on other operating costs.

Operating Expenditures

School corporation costs are divided into three categories: 1) operating expenses, which include teacher salaries and other day to day costs; 2) capital expenses, which include investment in the expansion of facilities, purchase of new school buses, and so forth; and 3) transportation expenses, which include school bus operation and maintenance, and bus driver salaries.

Dividing the number of new students by the class size service standard yields the number of new teachers required to keep average class size stable. The number of additional teachers times the average teacher salary gives the additional expenses on teacher salaries.

For example, the Pineview project increased Tippecanoe County School Corporation enrollment by 55. The number of new teachers needed is 3.23 (55 pupils divided by 16.55 pupils per teacher), and the additional salaries are $125,832 (average salary, $37,864, times 3.23). The standard for other operating expenditures is $1,948 per pupil. The 55 new pupils in the Pineview development are estimated to have added $107,140 to school corporation costs.

Transportation Expenditures

The transportation standard is $460 per pupil. This standard multiplied by the number of new pupils gives the addition to transportation costs. For the Pineview project, for example, additional transportation expenditures are estimated to be $25,300 ($460 x 55).

Capital Expenditures

The capital standard is 150 square feet per pupil. This figure times the number of new pupils yields the size of new facilities needed. The cost of facility expansion is calculated by multiplying the number of square feet of new facilities by the construction cost per square foot, $100. However, the cost of facility expansion is a one-time investment, which will benefit the school corporation for the remaining years of the facility. Hence, it is assumed that the total cost of new facilities is amortized over a 20 year period. That is, the corporation is assumed to borrow enough to build the new facility, then repay the loan in fixed annual payments, with interest, over 20 years. Currently, the average municipal bond interest rate is about 5.2%.

For example, enrollment from the Pineview project requires 8,250 additional square feet (55 x 150), which costs $825,000 ($100 x 8,250). Borrowing this amount and repaying it over 20 years at 5.2% produces an annual debt service payment of $67,327.

Fiscal Impacts

Fiscal impacts are simply the total added revenues less the total added costs for a development project. Since county, township and school corporation revenues and costs cannot be switched from one unit to another, separate fiscal impacts must be calculated for each. Direct impacts come from the development itself, while the indirect and construction impacts come from the effects of the development on the county's economy. Separate fiscal impacts are presented for direct, indirect and construction impacts. Finally, we present fiscal impacts for three scenarios based on differing assumptions about in-migration to the county and the incomes of new residents.

Tippecanoe County

Tables 4 through 7 summarize the fiscal impact results for the government of Tippecanoe County. Table 4 shows the added revenue generated by each development. Capilano by the Lake's direct revenue impact is the largest among the four, because it has the highest assessed value (Table 1), which generates some added property taxes, and especially because its residents have by far the highest income (Table 2), which generates added income taxes, assuming these incomes are new to the county. Point West has the second largest direct impact, simply because this development has by far the largest number of people. Even with relatively low incomes, Point West contributes substantial local income taxes, and substantial charges and fees, under our per capita method for measuring this part of revenues. The indirect and construction impacts of Capilano by the Lake are more than double Point West, however. Construction impacts for Point West are small because it mobile homes are manufactured.

Table 4

Total Additional Revenue for Tippecanoe County

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$115,248	$47,967	$34,971	$91,218
Indirect Impact	$28,653	$10,380	$6,660	$13,778
Construction Impact	$42,322	$18,327	$14,797	$7,986
Total First Year Impact	$186,223	$76,674	$56,428	$112,982
Total Long-term Impact	$143,901	$58,347	$41,631	$104,996

The total first year impact includes the direct, indirect and construction impacts. It is called "first year" because construction for each individual residence is assumed to take one year or less. In the second year and after, construction is complete and so construction workers add no further income or spending which can be attributed to each development. The long-term impact is the sum of the direct and indirect impacts, excluding construction.

Table 5 shows the added costs or expenditures for the Tippecanoe County government created by each of the four developments. Here, Point West has by far the largest impact, because it has by far the largest number of residents. Capilano by the Lake has the largest indirect and construction impacts, however, because the large incomes and market values from this development generate more new business activity in the local economy, and thus cause bigger increases in population. Again, the first year impact includes construction, and the long term impact does not.

Table 5

Additional Expenditure for Tippecanoe County

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$47,120	$47,864	$54,064	$222,208
Indirect Impact	$6,731	$2,438	$1,565	$3,236
Construction Impact	$9,942	$4,305	$3,476	$1,876
Total First Year Impact	$63,793	$54,607	$59,105	$227,320
Total Long-term Impact	$53,851	$50,302	$55,629	$225,444

Table 6 shows the fiscal impacts, which are simply the differences between the additional revenues in Table 4 and the additional expenditures in Table 5. Capilano by the Lake shows a relatively large positive direct impact under these assumptions. Green Meadow has a small positive impact, while Pineview has a negative impact and Point West a large negative impact. These results occur mostly because revenues are based on income and property value, while added costs are based on numbers of people. The higher is income and property value per person, the more positive or less negative will be the fiscal impact.

Table 6

Fiscal Impact for Tippecanoe County

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$68,128	$103	-$19,093	-$130,990
Indirect Impact	$21,922	$7,942	$5,096	$10,541
Construction Impact	$32,381	$14,022	$11,321	$6,110
Total First Year Impact	$122,431	$22,067	-$2,676	-$114,339
Total Long Term Impact	$90,050	$8,045	-$13,997	-$120,449

All indirect and construction impacts are positive. This is because added income generated by the spending of new residents is assumed to go mostly to existing residents, and less to people who migrate into the county. Added income and property values are taxed, but there are few new residents to demand services.

The long term fiscal impact shows a pattern: positive for Capilano by the Lake, smaller and then increasingly negative as one moves from higher to lower valued housing developments.

Table 7

Long Term Fiscal Impact for Tippecanoe County, Alternate Scenarios

	Capilano by the Lake	Green Meadow	Pineview	Point West
New Residents, Incomes	$90,050	$8,045	-$13,997	-$120,449
70% New Residents	$64,041	$6,465	-$9,190	-$71,528
All Residents have Average Income	-$19,962	-$19,070	-$19,665	-$45,113

Table 7 presents the above long term impacts, labeled "New Residents, Incomes" and the results of two other scenarios. One scenario assumes that only 70% of the residents of these developments moved into the county from outside. In each case, fiscal impacts are closer to zero

--less positive for Capilano by the Lake and Green Meadow, less negative for Pineview and Point West. This is simply a matter of size. If there are fewer new residents, there are fewer new service demands, and less additional income to tax. Taxes on the assessed value of the new houses remains a net addition, but on the whole smaller numbers of new people produce smaller fiscal impacts, plus or minus.

Assuming that all residents have the county average income changes the fiscal impact of Capilano by the Lake from positive to negative. This scenario is based on the assumption that people moving into each of these four developments left other housing within the county, and that the housing they vacated was occupied by someone from outside the county with average income. A large share of the positive fiscal impact of Capilano by the Lake comes from the large amount of income tax paid by its upper income residents, and the county receives a large share of income tax revenue paid. If these residents were not new to the county, and those that were new had the average county income, then the amount of new income tax revenue generated by the development is greatly reduced. The same argument applies to Green Meadow and Pineview, though to a lesser extent because their residents' incomes are lower. Point West, on the other hand, had a less negative fiscal impact under the average income scenario. This is because Point West residents are assumed to have below average incomes.

Wabash Township

The Wabash Township government has a small budget, and so the fiscal impacts of development on the township also are small. Table 8 shows the added revenue to the township. This time Point West has the largest impact, because of the motor vehicle excise tax. The large number of Point West people own a large number of cars. The township receives additional revenue from excise taxes on each car. The township, however, receives little extra revenue from property taxes, because of the state tax controls, and little extra revenue from local income taxes, since it receives only a tiny fraction of COIT funds and no CEDIT revenue. Indirect and construction impacts show the same pattern across developments in the township as in the county, for the same reasons. Overall, Point West has the highest first year and long term revenue impacts on the township government.

Table 8

Total Additional Revenue for Wabash Township

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$416	$282	$229	$728
Indirect Impact	$63	$23	$14	$31
Construction Impact	$99	$41	$32	$18
Total First Year Impact	$578	$346	$275	$777
Total Long-term Impact	$479	$305	$243	$759

Table 9 shows the added expenditure impacts on the Wabash Township government. Again, since most government costs are assumed to vary with population, the large number of people in Point West create the largest cost impact. The long term cost impact for Point West are more than four times those of the other three developments.

Table 9

Additional Expenditure for Wabash Township

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$688	$699	$789	$3,244
Indirect Impact	$36	$14	$7	$18
Construction Impact	$54	$25	$18	$11
Total First Year Impact	$778	$738	$814	$3,273
Total Long-term Impact	$724	$713	$796	$3,262

Thus, as shown in Table 10, Point West has by far the largest negative direct, first year and long term fiscal impacts. Interestingly, for the township government, even Capilano by the Lake has

Table 10

Fiscal Impact for Wabash Township

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	-$272	-$417	-$560	-$2,516
Indirect Impact	$27	$9	$7	$13
Construction Impact	$45	$16	$14	$7
Total First Year Impact	-$200	-$392	-$539	-$2,496
Total Long Term Impact	-$245	-$408	-$553	-$2,503

a small negative long term fiscal impact in this new resident, new income scenario. This is mainly because the township shares in little of the county's local income tax revenue.

Table 11

Long Term Fiscal Impact for Wabash Township, Alternate Scenarios

	Capilano by the Lake	Green Meadow	Pineview	Point West
New Residents, Incomes	-$245	-$408	-$553	-$2,503
70% New Residents	-$131	-$232	-$343	-$1,568
All Residents have Average Income	-$502	-$469	-$567	-$2,334

As for the county, the alternate scenarios change the fiscal impacts in predictable ways (Table 11). With fewer new residents, the 70% scenario shows all fiscal impacts closer to zero. With new residents assumed to have average incomes, Capilano by the Lake, Green Meadow and Pineview show larger negative fiscal impacts, and Point West shows a smaller negative fiscal impact, compared to the new residents and incomes scenario.

Tippecanoe School Corporation

State school aid is distributed on a per pupil basis. Since Point West has by far the largest number of pupils, it has by far the largest direct revenue impact, as shown in Table 12. The indirect impacts are greatest for Point West and Capilano by the Lake, while Capilano by the Lake has the largest construction impact. Overall, though, the long term revenue impact of Point West is more than twice that of any of the other three developments.

Table 12

Additional Revenue for Tippecanoe School Corporation

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$213,132	$297,952	$307,172	$679,408
Indirect Impact	$14,930	$5,328	$3,392	$17,244
Construction Impact	$21,479	$9,409	$7,566	$4,091
Total First Year Impact	$249,541	$312,689	$318,130	$700,743
Total Long-term Impact	$228,062	$303,280	$310,564	$696,652

To maintain school service standards, more pupils require more teachers and more building space. Table 13 shows that the added Point West pupils add more to costs, simply because so many pupils live there.

Table 13

Additional Expenditure for Tippecanoe School Corporation

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$213,132	$307,857	$325,618	$734,120
Indirect Impact	$10,064	$3,552	$2,250	$11,486
Construction Impact	$14,208	$6,275	$5,032	$2,724
Total First Year Impact	$237,404	$317,684	$332,900	$748,330
Total Long-term Impact	$223,196	$311,409	$327,868	$745,606

Table 14 shows the net fiscal impact. Both the direct and total long term impacts show a pattern: positive fiscal impacts for Capilano by the Lake, increasingly negative fiscal impacts for the other three as assessed values and incomes per household decline. The difference between the impacts of Capilano by the Lake and Point West are smaller than for the county, however. In the new resident and income scenario Capilano by the Lake had a positive long term fiscal impact of about $90 thousand and Point West had a negative impact of about $120 thousand, a range of $210 thousand. For the school corporation, the range is only $90 thousand. The reason is that state aid offsets low property wealth. The effect on general fund revenues of an added pupil from Point West is the same as for Capilano by the Lake. This occurs because almost all of the Point West pupil revenue comes from state aid, while about half of Capilano by the Lake pupil revenue comes from property taxes. The differences between Capilano by the Lake and Point West stem mostly from property taxes raised for the capital projects and transportation funds, which are affected by differences in assessed value.

The negative fiscal impact of the Point West development for the school corporation is less than a third of what it is for the county government (at -$120,449), despite the fact that the Tippecanoe School Corporation's budget is larger. Again, this is mainly because state school aid is distributed per pupil, and is designed to offset differences in property wealth. Point West's low assessed value per pupil does not create the fiscal disadvantage that is does for the county.

Table 14

Fiscal Impact for Tippecanoe School Corporation

	Capilano by the Lake	Green Meadow	Pineview	Point West
Direct Impact	$36,494	-$9,904	-$18,446	-$54,712
Indirect Impact	$4,866	$1,776	$1,142	$5,758
Construction Impact	$7,271	$3,134	$2,544	$1,367
Total First Year Impact	$48,631	-$4,994	-$14,760	-$47,587
Total Long Term Impact	$41,360	-$8,128	-$17,304	-$48,954

Table 15 shows one alternate scenario for the school corporation. The average income scenario is dropped because the school corporation does not share in county income tax revenue, so it shows no real difference from the standard scenario. In each case the 70% new resident assumption makes the fiscal impacts more positive or less negative. For the other units this assumption pushed each closer to zero. Schools do not share in the local income tax, but do collect extra property tax revenue from new assessed value in the capital projects and transportation funds. For schools under the 70% assumption, there are fewer new pupils to educate, no income tax revenue is lost, and all of the new property tax revenue is still collected. Fiscal impacts look better for each development.

Table 15

Long Term Fiscal Impact for Tippecanoe School Corporation, Alternate Scenarios

	Capilano by the Lake	Green Meadow	Pineview	Point West
New Residents, Incomes	$41,360	-$8,128	-$17,304	-$48,954
70% New Residents	$49,753	$3,774	-$5,094	-$20,721

Savings for Property Taxpayers

The state controls civil government property tax levies so that increases in assessed value usually reduce property tax rates rather than increase property tax revenues. In addition, debt service repayment schedules are fixed, so that increases in assessed value reduce the property tax rate needed to pay debt service. Thus, part of the impact of development is to reduce tax rates for existing taxpayers. This is not a fiscal impact on government, but it ought to be considered for a complete analysis of the tax and spending effects of development.

Table 16 shows the dollar value of the property tax reductions and the tax rate cut caused by the four residential developments. The dollar figures were calculated by dividing each jurisdiction's maximum and debt service levies by total assessed value, with and without the assessed value of each development. The difference between these two tax rates shows the rate reduction produced by the development's added assessed value. The rate reduction times the jurisdiction's assessed value gives the dollar value of the tax reduction.

These are the "direct" tax reductions, those resulting from the new assessed values of the developments themselves, not including the indirect effects. The direct effects are known with certainty, since the are calculated directly from assessment and tax levy data. Indirect effects are estimates. The direct effects are the same for each of the three scenarios, and are five to 40 times bigger than the indirect effects. To save space, only the direct effects are reported.

Capilano by the Lake has the largest assessed value (see Table 1), so it produces the largest tax reduction. The other three developments have similar assessed values, and produce similar tax reductions. The Capilano by the Lake tax cut of $32,621 means that existing county taxpayers had their taxes reduced by this amount when this development was built.

Table 16

Direct Property Tax Reductions

	Capilano by the Lake	Green Meadow	Pineview	Point West
Tippecanoe County
Tax Cut, dollars	$32,621	$13,263	$10,155	$12,152
Tax Cut, rate (dols./$100 A.V.)	$0.0026	$0.0011	$0.0008	$0.0009
Wabash Township
Tax Cut, dollars	$1,486	$608	$466	$557
Tax Cut, rate (dols./$100 A.V.)	$0.0005	$0.0002	$0.0002	$0.0002
Tippecanoe School Corporation
Tax Cut, dollars	$39,559	$15,980	$12,112	$17,506
Tax Cut, rate (dols./$100 A.V.)	$0.0071	$0.0029	$0.0022	$0.0031
Total Impact on County/Township/School Corporation Taxpayer
Tax Cut, rate, total	$0.0102	$0.0042	$0.0032	$0.0042
Tax Saving, owner of $100,000 house	$2.14	$0.88	$0.67	$0.88

Should these dollar tax cuts be added to the fiscal impacts reported in Tables 7, 11 and 15? In one sense they could be. Indiana tax control rules force local governments to use some of the benefits of development for property tax cuts. If public services and private spending are of equal value to citizens, a negative fiscal impact on government which might require service cuts could be offset by a tax reduction. If these tax cuts are added to the fiscal impacts, Capilano by the Lake has a positive impact in all three scenarios for all three governments. Its negative impacts in the county average income scenario and all three township scenarios are more than offset. Green Meadow's negative fiscal impacts in all three township scenarios turn positive if tax cuts are included, and its negative impact in the county average income scenario is reduced by three quarters. Pineview has a positive fiscal impact in the 70% new resident scenario for all three jurisdictions. The remaining scenarios retain a negative impact, though they are of course smaller. Point West's fiscal impacts remain negative, and are cut by about a third, at most.

In another sense, though, the government fiscal impacts and existing taxpayer tax cuts should be considered separately. To say, for example, that Green Meadow has a positive fiscal impact because its construction caused tax cuts misses the potential problems with maintaining service delivery facing the local governments. Perhaps it is best to keep the figures separate, with an understanding that they are two aspects of the tax and spending effects of development.

Property Tax Rate Changes Needed to Offset Fiscal Impacts

When development produces a negative fiscal impact, what happens? There are three possibilities: government departments could be asked to produce more services with their existing budgets, the government could reduce service quantity or quality, or the government could raise taxes on existing taxpayers to raise enough revenue to maintain services. The Wabash Township volunteer fire department is an example of the first possibility, delivering more services with existing budgets. Volunteers have responded to development by making more runs. An example of the second possibility, reducing service quantity or quality, might be the lengthening of road maintenance schedules when there are more residential road miles and no extra road maintenance funds.

The third possibility, raising taxes, is difficult for Indiana local governments. Some counties have adopted local income taxes or the wheel tax and auto excise surtax in response to development. But property taxes are tightly controlled, so it is usually not possible to raise tax rates to cover a negative fiscal impact.

Table 17

Hypothetical Property Tax Changes to Offset Fiscal Impacts

	Capilano by the Lake	Green Meadow	Pineview	Point West
Rate Change, All Units
New Residents, Incomes	-$0.0146	$0.0010	$0.0044	$0.0194
70% New Residents	-$0.0140	-$0.0011	$0.0018	$0.0101
All Residents have Average Income	$0.0018	$0.0017	$0.0018	$0.0045
Change in Tax Payment, Owner of $100,000 House
New Residents, Incomes	-$3.06	$0.20	$0.93	$4.08
70% New Residents	-$2.95	-$0.23	$0.37	$2.11
All Residents have Average Income	$0.38	$0.36	$0.38	$0.94

Table 17 shows the rate changes needed to offset the positive and negative fiscal impacts, summed for all three jurisdictions, under each scenario. These figures are presented for comparison purposes, to convert the dollar fiscal impacts into tax changes which taxpayers might recognize. Again, this does not imply that it is possible for local governments to raise property taxes to cover revenue shortfalls due to development. Property tax controls prevent such rate increases. It is possible, however, to cut tax rates to offset positive impacts. Rate cuts offset positive fiscal impacts; rate hikes offset negative fiscal impacts.

The results show rate and tax payments changes that are quite small. Some fiscal impacts are in the thousands of dollars, and this may be significant for local government service delivery. But when these impacts are spread over hundreds of millions of dollars of assessed value, and thousands of taxpayers, they have only small impacts on the taxes of individual taxpayers.

Summary and Interpretation

This study analyzes fiscal impacts, the impacts on local government revenues and costs of four residential developments in unincorporated Wabash Township. The developments are Capilano by the Lake, a development of expensive homes, Green Meadow and Pineview, developments with mid-priced homes, and Point West, a mobile home park. The governments studied are those of Tippecanoe County, Wabash Township and the Tippecanoe School Corporation.

The fiscal impact analysis models Indiana's property tax controls, local income tax distribution formula and state school aid formula in detail. It uses a modified per capita method for non-school government costs, and a "service standard" method for school corporation costs. It takes account of indirect and construction impacts on the local economy by using multipliers generated by an input-output model. It looks at three alternate scenarios, based on assumptions about in-migration to the county and the incomes of new residents.

We find that the development with expensive homes, Capilano by the Lake, has a positive fiscal impact on the Tippecanoe School Corporation budget. That is, the construction of these houses and their occupation by families adds revenue for the school corporation that exceeds the added costs of educating the families' children by $40,000 to $50,000 per year, depending on the scenario. This residential development also has a positive fiscal impact on the Tippecanoe County government under two of three scenarios, and a negative effect in a third, with a range of negative $20,000 to positive $90,000. It has a small negative effect on the Wabash Township government, ranging from negative $130 to negative $500 per year.

We find that the mobile home park, Point West, has a negative fiscal impact on all three units of government, in all three scenarios. The impact on the county government ranges from negative $45,000 to negative $120,000 per year; on the township government, from negative $1,500 to negative $2,500; and on the school corporation, negative $21,000 to negative $49,000. In each case, the added costs of delivering services due to the Point West development exceeds the added revenue due to the development.

We find that of the intermediate housing developments, Green Meadow has both positive and negative impacts, depending on the scenario and government, while Pineview has a negative impact in all scenarios, for all governments. Depending on the scenario, Green Meadows' range of fiscal impacts on the county government is negative $19,000 to positive $8,000 per year, while Pineview's range is negative $9,000 to negative $20,000. For the township government, the range for Green Meadow is negative $230 to negative $470 per year, and for Pineview is negative $340 to negative $570. For the school corporation, the range for Green Meadow is positive $3,800 to negative $8,200, and for Pineview negative $5,100 to negative $17,000.

County and township governments do not receive much additional property tax revenue from development in Indiana, because the state property tax controls restrict the levy (revenue collected), not the rate. A large amount of residential construction would be needed to raise the property tax levy, and none of these developments were that large. This contributes to the generally negative fiscal impacts of residential development. This means, however, that each of these developments reduces the property taxes of existing taxpayers, since there is more assessed value to support a given tax levy. The total effect is sometimes comparable to the fiscal impacts, and, if added to the fiscal impacts on governments, could offset negative fiscal impacts for Capilano by the Lake and Green Meadow. However, the reductions in individual taxpayers' tax bills are tiny.

The county and township receive shares of the local income tax in Tippecanoe County. The county government receives a large share, and this is the main reason why the addition of high income residents in Capilano by the Lake created a positive fiscal impact for the county. Note, however, that this development's positive fiscal impact lessens to the extent that its wealthy residents were not new to the county when they moved to Capilano by the Lake. If the in-migrants resulting from this development are average income people moving into houses that the new Capilano by the Lake residents vacated, then this high value development has a negative fiscal impact on the county.

The Tippecanoe School Corporation receives a large amount of revenue from state aid, and nothing from the local income taxes. Aid is distributed per pupil, and increases relative to property taxes when property wealth per pupil is lower. This explains why the negative fiscal impact of the mobile home park, Point West, is relatively small for the school corporation, especially compared to the large size of the corporation's budget. Because it receives no income taxes, the relatively low incomes of Point West residents are not a disadvantage for the school corporation. And because state aid offsets low property wealth, Point West pupils generate almost as much revenue as Capilano by the Lake pupils.

Comparison to Past Results

Our fiscal impact results for four residential developments in unincorporated Wabash Township, Tippecanoe County, Indiana, are consistent with past results for different localities. Oakland and Testa (1995) review the literature on fiscal impact analysis and find that residential development unaccompanied by commercial-industrial development generally produces a negative fiscal impact. Added costs exceed added revenues. They write that "low-to-middle income single family housing is usually found to be a losing proposition" (p.3). New commercial development, on the other hand, appears to have a positive fiscal impact.

Burchell and Listokin's (1993) long experience with fiscal impact analysis allowed them to construct a "hierarchy" of land uses and fiscal impacts, shown here as Table 18. They find that expensive single family houses generally have positive fiscal impacts on school districts but negative impacts on municipalities, which includes cities, towns and counties. Our results showed Capilano by the Lake housing to have positive fiscal impacts on both the county and school corporations in two scenarios, but when new residents were assumed to have county average incomes, the impact on the county was negative. Green Meadow housing had a positive

RESEARCH OFFICE PARKS

OFFICE PARKS

INDUSTRIAL DEVELOPMENT

HIGH-RISE/GARDEN APARTMENTS (STUDIO/ 1 BEDROOM)

AGE-RESTRICTED HOUSING

(+) GARDEN CONDOMINIUMS (1-2 BEDROOMS)

MUNICIPAL

BREAK-EVEN

(-) RETAIL FACILITIES

TOWNHOUSES (2-3 BEDROOMS)

EXPENSIVE SINGLE-FAMILY HOMES (3-4 BEDROOMS)

(+)

SCHOOL DISTRICT

BREAK-EVEN

( - )

TOWNHOUSES (3-4 BEDROOMS)

INEXPENSIVE SINGLE-FAMILY HOMES (3-4 BEDROOMS)

GARDEN APARTMENTS (3+ BEDROOMS)

MOBILE HOMES (UNRESTRICTED AS TO OCCUPANCY LOCALLY)

Source: Burchell and Listokin (1993).

fiscal impact on the county in two scenarios, negative in another. For the school corporation, Green Meadow had one positive impact and one negative impact in two scenarios. Burchell and Listokin's hierarchy show lower valued single family homes as having negative fiscal impacts on both civil governments and schools, and we found Pineview to have negative fiscal impacts for both. Finally, the hierarchy puts mobile homes at the bottom, with the most negative fiscal impact of any land use. Our results show this too.

The authors show office parks, apartments and industrial development as having positive fiscal impacts on both school districts and municipalities.

People, Jobs and Boundaries

Economists have argued for years about whether "jobs follow people" or "people follow jobs." Do firms expand and relocate, creating new jobs which people migrate to a region to fill? Or do people migrate for other reasons (like climate), and firms follow to take advantage of growing product demand and abundant labor supply? The evidence is mixed on this question, but the question itself demonstrates that, often, population and industry grow together.

Thus, it is somewhat artificial to isolate the fiscal impact of residential development, without considering the commercial and industrial development which may accompany it. Our multiplier analysis accounts for added development resulting from business growth driven by the demands of new residents. But it does not account for the labor supply effects, for example, added business growth which might occur because of the availability of employees in the Point West development. And, if people follow jobs, the first cause of the residential development would be industrial or commercial development. This analysis does not account for such fiscal impacts. Since commercial and industrial development tend to have positive fiscal impacts, this analysis skews its results toward the negative by looking at only a piece of the full industrial-commercial-residential development picture.

But boundaries make a difference. If both the business and residential development take place in the same jurisdiction, the negative and positive fiscal impacts may offset one another in the jurisdiction's budget. But if the business development takes place in one jurisdiction, and the residential development in another, isolating the fiscal impact of residential development makes sense. In our analysis, both the business and residential development are probably affecting the budget of Tippecanoe County. The county may have industrial and commercial development which offsets the negative fiscal impacts of residential development. But to a degree Tippecanoe County Schools, and especially Wabash Township, may have seen a larger share of the residential development and a smaller share of the business development.

In a sense, then, negative fiscal impacts are boundary problems. Business and residential development often go together, but jurisdictions that see the lion's share of the residential development are likely to experience negative fiscal impacts.

What is a Fair Tax?

There are two ways to evaluate the fairness of taxes. Under the benefit principle taxes are fair when people pay taxes equal to the value of the government services they use. Under the ability to pay principle, taxes are fair when people with more income or wealth pay more, and people with less income or wealth pay less.

Are these fiscal impact results evidence of fair or unfair taxation? Supporters of the benefit principle would regard negative fiscal impacts as unfair. New residents consume government services in excess of the taxes they pay. The difference is supported by existing residents through higher taxes or lower quality services. A mobile home development such as Point West would be seen as especially unfair, with residents using services well in excess of the taxes they pay.

Supporters of the ability to pay principle would regard fiscal impacts that are positive for upper income households and negative for lower income households as fair. If government provides equal access to public services regardless of income, and finances these services with taxes based on ability to pay, a negative fiscal impact for lower income development seems inevitable. Higher income people, such as those living in Capilano by the Lake, pay taxes near or above the value of the services they receive. Lower income people, such as those living in Point West, receive services beyond what they pay in taxes. This could be seen as one way communities promote equality of opportunity, by delivering public services--especially public schooling--beyond what low income people could afford were they to pay the services' full price.

Just One Piece of the Larger Puzzle

Finally, citizens and policy makers should be reminded that a development's fiscal impact is but one of the factors to consider when deciding land use policy. The fiscal impact is important, and ought to be useful in helping local governments plan their budgets, taxes and service delivery policies. But other factors are important, too. What is the development's full economic effect? What is the development's environmental effect? What impact does the development have on, say, the rural character of a community? Are their equity questions that should be considered? It is easy to imagine developments that create jobs and incomes yet have negative fiscal impacts, or have harmful environmental effects yet have positive fiscal impacts. Fiscal impacts are important, but are far from the only factors to be considered in land use policy.

References

Burchell, Robert W. and David Listokin. Fiscal Impact Procedures ­ State of the Art.

New Brunswick, NJ: Center for Urban Policy Research, Rutgers University, 1993.

DeBoer, Larry. "Housing Construction and Population Growth in Indiana Counties." Unpublished memo. August 15, 1997.

Federal Reserve Board. "Family Finances in the U.S.: Recent Evidence from the Survey of Consumer Finances." Federal Reserve Bulletin (January 1997): 1-24.

Indiana State Board of Tax Commissioners. Report of the Indiana Fair Market Value Study. Presented to the Interim Study Committee on Real Property Assessment Practices, Indiana General Assembly, Indianapolis, December 10, 1996.

Indiana Tax Watch. "School Benchmarks Committee Issues Report." Taxpayers Research Association, 7 (October 1995): 1-7.

Minnesota IMPLAN Group. Micro IMPLAN Users Guide. St. Paul, Minnesota, January 1993.

Oakland, William H. and William A. Testa. "Does Business Development Raise Taxes?" Federal Reserve Bank of Chicago Economic Perspectives (March/April 1995): 22-32.

Tax Foundation. Facts and Figures on Governmental Finance. Washington, D.C.: Tax Foundation, 1994.

U.S. Department of Energy. Household Vehicles Energy Consumption 1994. DOE/EIA-0464(94). Washington, D.C.: U.S. Department of Energy, August 1997.