The Fiscal Impact of Economic Growth and Development on Local Government Revenue Capacity

By Wong, John D. | Journal of Public Budgeting, Accounting & Financial Management, Fall 2004 | Go to article overview

The Fiscal Impact of Economic Growth and Development on Local Government Revenue Capacity


Wong, John D., Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. The focus of this article is to examine the relationship between local economic growth and development and local government revenue capacity. A model is established to determine the relationship between the number of agricultural, manufacturing, service, and retail establishments per capita and employees per capita on real local government property tax capacity per capita. High property tax levies are highly negatively correlated with tax capacity. Population density, the general price level, and the presence of local retail sales taxes also play a role in determining tax capacity. New business creation in the service industry does appear to have a positive impact on local government tax capacity, while increases in agricultural, manufacturing, and retail activity do not. Although increasing concentration in the number of service establishments has a positive impact on tax capacity, increasing concentration in the number of service workers alone does not seem to lead to increases in tax capacity.

INTRODUCTION

The fiscal impact of growth and development on communities has become a major issue because many areas across the U.S. experienced substantial growth. Many growing communities have been faced with the prospect of financing growth and development related infrastructure such as off-site streets and waste-water treatment facilities. Concern about the fiscal effect of growth is best evidenced by the rapidly increasing trend to adopt impact fees. One lingering question is: Does economic growth and development necessarily increase overall local government revenue capacity? The focus of this paper is to examine the relationship between local economic growth and development and local government revenue capacity. Specifically, a model is established to determine the relationship between the number and proportion of agricultural, manufacturing, service, and retail establishments per capita and employees per capita on real local government property tax capacity per capita.

According to Burchell and Listokin (1992) the fiscal impact of growth and development varies depending on the types of land use involved. Land uses that impose an above average demand on local government services such as education, public safety, recreation and social services have a negative fiscal impact, while land uses that impose a below average demand on local government services will have a positive fiscal impact.

Differences in economic growth and development outcomes among communities are reinforced by local political boundaries which are seldom coterminous with economic demarcations. The economic status of residents, labor force composition, and size and functions of local government are reflected in governmental boundaries (Danielson & Wolpert, 1992). Since local governments bundle differing packages of public goods and services, some of which may be amenable to certain economic activities and hostile toward others, economic growth and development policies both explicitly and implicitly encourage certain economic activities while discouraging others.

TRADITIONAL FISCAL IMPACT ANALYSIS

Traditional fiscal impact analyses focuses on determining the service demands imposed on local governments by economic growth and development and the assignment of costs to these demands. These projected expenditures are usually determined with reference to a standardized per unit parameter such as per household, per employee, or per square foot. Likewise, revenue contributions are typically projected by merely multiplying the estimated increase in the relevant revenue base by the appropriate rate. Unfortunately, fiscal impact analyses seldom measure the effects of growth and development by investigating actual service demands imposed, the marginal costs of meeting those demands, and the actual revenue contributions generated to meet those demands. Therefore, the validity of traditional fiscal impact analyses is heavily dependent upon the validity of the initial underlying assumptions upon which it was based. …

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