Academic journal article Economic Perspectives

Does Business Development Raise Taxes?

Academic journal article Economic Perspectives

Does Business Development Raise Taxes?

Article excerpt

Many suburban communities experienced rapid business development and employment growth during the 1980s. Community planners and development officials tended to encourage business development not only because it promised increased employment, but also because they believed it would increase the tax base, drawing new taxes from nonresident business owners to the benefit of community residents.(1)

These beliefs have recently been challenged, however, by some urban planners and other analysts of the suburban growth process who maintain that business development brings along high costs in associated public services and infrastructure, and that intergovernmental aid to pay for these costs is too low.(2) Critics of urban land-use expansion further contend that job suburbanization isolates the urban poor from gainful employment, contributes to over-development of land and spoilage of agricultural land at the urban fringe, and raises overall metropolitan-area public service costs by requiring new infrastructure that duplicates what already exists in the urban core. In contrast, others argue that the "not in my backyard" response by communities has unduly constrained economic growth and standards of living. This article assesses the local fiscal impact of business development by first reviewing previous studies and then investigating the statistical relationship between business development and residential property tax rates for 115 Chicago suburbs during the 1980s.

What do previous studies tell us?

Previous studies have assessed the fiscal impact of business development using two different methodologies. One approach generalizes from the outcomes of many different case studies that tabulate the fiscal costs and benefits of individual business developments. The other examines the statistical relationship between general business growth and community fiscal well-being. So far, both approaches have produced ambiguous or contradictory findings; studies can be found suggesting that business development brings a net fiscal benefit, and that it does not.

Fiscal impact studies

So many local officials have become concerned about the fiscal impact of land development that an entire methodology has been developed to address the question in specific circumstances. This methodology, known as fiscal impact analysis, compares the public service costs of land development in a particular use to the public revenues that the development is expected to generate.(3)

Although most recent fiscal impact studies share this general methodology, these studies vary widely in sophistication.(4) Nonetheless, the findings of fiscal impact studies over the past four decades indicate a dichotomy between business and residential development with respect to fiscal impact. Generally speaking, and with important exceptions, commercial and industrial development (hereafter referred to as "business development") appears to more than pay its way fiscally. Specifically, the public revenues generated from business development tend to exceed the costs of the public services they require. For example, some extensive studies of the impacts of individual developments, such as the Saturn plant, suggest that the local revenues generated by industrial development exceed the generated service costs by a factor of three.(5) In contrast to most business development, most types of residential development, especially single-family detached housing, are found to be losing propositions. The households inhabiting such housing tend to pay property and other local taxes that fall short of the costs of public services consumed. Elementary and secondary education is commonly implicated as the major public service cost associated with such households.(6) The divergence between the fiscal impact of residential development and that of business development can, in some instances, become irrelevant because people tend to follow jobs, and vice versa. Accordingly, for example, the fiscal benefits of business development can be subsequently negated as population in-migration responds to job growth. …

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