2007-095-RES-Accepting and approving the Paris Economic Development Corporation Budget for the Fiscal year October 1, 2007; to September 30, 2008

Home Browse Search

Lamar County — Paris Economic Development Plan Guiding Principle 5: Job Growth's Fiscal Benefits Are Often Elusive Because of the Costs of New Infrastructure, But Job Retention Often Has _Fiscal Benefits Because It Uses Existing Infrastructure. Two key principles should be kept in mind in assessing the fiscal effects of economic development. First, the fiscal impact depends on the marginal costs and revenues of the additional local jobs and population that occur because of the economic development program. The marginal costs and revenue from one new job or person are usually quite different from the average costs or revenue associated with jobs and people already in the metropolitan area. Second, any evaluation must consider the capital costs of new infrastructure, not just operating costs. It is important to understand the conditions under which economic development can be fiscally unprofitable. Local tax systems are set up so that average tax revenues cover average costs. Additional jobs and people generally result in similar tax revenues per job or person as existing jobs and people, unless special development subsidies or impact fees are used. Marginal public service costs associated with additional jobs and people are, however, often much greater than the average costs. In part, marginal costs usually exceed average costs because retrofitting infrastructure to handle higher demand is expensive. Doubling the capacity of a road or water or sewer plant that already exists will usually more than double the acquisition costs. In a book on impact fees, Alan Altshuler and Jose Gomez - Ibanez indicate the potential infrastructure costs associated with new development and the complexities associated with analyzing those costs. They summarize two studies done of the fiscal impact of new development on Montgomery County, Maryland, which provides most local public services in the county and collects most local taxes. A 1969 study assumed that the costs of new infrastructure would equal the average debt costs and maintenance costs currently paid for existing infrastructure. However, this assumes that debt and maintenance costs on required net new public capital would be no higher than the costs on old infrastructure. According to this study, most taxable new business activity, without accompanying Montgomery County growth in households, produces two to six times as much revenue as its public service costs. Even if all new employees lived in the county, the 1969 report concluded that new development would be fiscally profitable for hotels or office complexes. Office complexes were estimated to produce $1.29 in local revenue for every dollar in additional public service cost they require. A 1989 study looked only at large office parks, one of the most fiscally profitable new development types in the 1969 study, and concentrated on the costs of additional highways to serve a new office complex. Unlike the 1969 study, this study looked at the actual cost of adding new highway capacity and found that the additional county revenues per office worker per year of $410 would barely exceed the $347 per worker per year that the additional highway capacity would cost. Altshuler and Gomez - Ibanez comment that "with such a slim margin, little tax revenue was left over to fund other county services that the office building might require (such as sewer, water, solid waste, police protection, or fire protection), let alone those required by the households of employees. If this result held for office parks, the most profitable form of development under the 1969 analysis, it doubtlessly was even more true of other types of businesses or residential developments." The fiscal impact on a local government appears quite favorable when we are considering an economic development policy aimed at preventing a local economy from declining in employment or population. Local economic decline will tend to lead to a proportionate decline in public revenues. But infrastructure costs will not decline. The infrastructure is already in place and has in part already been financed. It is usually infeasible to abandon much existing infrastructure, and this would only save maintenance costs. Thus, by avoiding the losses associated with economic decline, economic development policies that help retain jobs and people produce a fiscal benefit. Paris Economic Development Corporation Page 46