State Fiscal Impact Analysis Guide and Considerations

Transcription

1 State Fiscal Impact Analysis Guide and Considerations Paul Scheuren

2 Economic consulting firm based in Austin, TX 20+ years experience evaluating economic development projects License models to 100+ EDOs nationally and provide reports as needed for many more Podcast: Economic Development Secrets and CEcD

3 Tennessee Department of Economic and Community Development (TNECD) Developed and currently support a project-based software model to evaluate the economic and fiscal impact of proposed projects Assisted in aggregating individual project impacts into summary of the state s programs

4 New Mexico Economic Development Department (NMEDD) Developed and currently support a project-based software model to evaluate the economic and fiscal impact of proposed projects Contract since 1999

5 Other State Fiscal Analysis Experience Texas Enterprise Fund (TEF) TEF application process requires the business to provide an independent third-party report We ve prepared 100+ reports since the program was started in 2004 State-level analyses for individual studies prepared for proposed projects in Arkansas California Florida Kentucky Louisiana Minnesota New York Ohio Pennsylvania West Virginia and others

6 State Fiscal Impact How-To Guide* My focus will be on economic development project analysis Analysis of prospective law changes have some cross over, but require a different analysis. Be transparent Explain what you did and how you did it Unfortunately there is no standard terminology or presentation Be consistent Create a process and apply it uniformly The lack of standard leads to confusion and misinterpretation * According to Impact DataSource and based on our experience.

7 Economic Development Chain Reaction Economic Impact Fiscal Impact Incentive Analysis

8 1. Gather Project-Specific Information

9 1. Gather Project-Specific Information Location of the Project Adjust for spending leakage A Project in Nashville vs. Memphis NAICS Industry Classification Used to obtain industry-specific impact multipliers and determine what credits and incentives may apply Hiring Schedule & Wages Evaluate the phasing of the Project over a multi-year horizon Investment Schedule Estimate temporary construction impact Determine company s net worth, book value, taxable property

10 1. Gather Project-Specific Information Most states have a standard project application that includes this information TNECD has an AFI Application for Incentives NMEDD uses an Excel-based project data sheet

11 2. Estimate Economic Impact

12 2. Estimate Economic Impact Economic activity occurs when money changes hands Measured with four different metrics Employment Household Earnings Economic Output Value Added How useful is economic output and value added? Employment & earnings are typically more instructive Separate Temporary Activity from Permanent Activity

13 2. Estimate Economic Impact Multipliers for any type of impact Direct Effect Employment Multiplier Example: Furniture Mfg 2.05 Dallas County 2.73 Statewide Indirect Business-to-business spending Induced Employee-to-business spending

14 3. Public Revenues vs. Public Costs

15 3. Public Revenues vs. Public Costs Economic impacts drive Fiscal Impacts Tax revenue and government costs Income tax, Property Tax, Sales Tax, Fees, etc. Costs to provide Public Safety services or Education New business activity or new workers move to the area One-time costs for infrastructure or other government expenditures?

16 3. Public Revenues vs. Public Costs Unique Perspective Required The question is: How doe the project affect the state s fiscal position? This is a different question from how much tax does the new company pay the state? The tax paid by the company is relevant but doesn t give a complete answer Workers may pay sales or income taxes Indirect and induced business activity may also be considered Keep this unique perspective in mind as you interact with colleagues in the department of revenue or other departments

17 3. Public Revenues vs. Public Costs Review state budget or financial reports What are the major sources of revenue that should be accounted for? In Tennessee for example, we chose the top three revenue sources that account for 80% of revenue to the DOR Sales and Use Tax Excise Tax Franchise Tax

18 3. Public Revenues vs. Public Costs

19 3. Public Revenues vs. Public Costs Source of Total State & Local Tax Revenue 80.0% 72.5% 70.0% 60.0% 50.0% 40.0% 36.9% 30.0% 31.4% 20.0% 12.4% 15.9% 10.0% 0.0% 4.8% 5.3% 6.1% 4.6% 4.1% 1.7% 2.7% 1.2% 0.3% Property General sales Selective sales Individual income Corporate income Motor vehicle license Other taxes State Local Source: State and Local Government Finances by Level of Government and by State: , U.S. Census of Governments and Impact DataSource Analysis

20 3. Public Revenues vs. Public Costs Estimate tax as directly as possible For example, calculate sales taxes based on the estimated spending related to the project and its workers. One-time construction or equipment investments The company s on-going taxable sales or spending, if any Worker spending In the case of TNECD, capital investment enabled us to estimate the franchise tax liability Incorporate input from Department of Revenue colleagues to help you better understand these revenues and how to estimate them for your context.

21 3. Public Revenues vs. Public Costs What about taxes from spin-off economic activity or when you can t estimate revenues directly? Tax Factors Tax Factors quantify the relationship between statewide tax revenue and a proxy for state economic activity.

22 3. Public Revenues vs. Public Costs Apply Tax Factors to the estimated economic impacts for the subject Project You can separate direct and indirect/induced components. Some Cautions Is your definition of employment or personal income consistent between the tax factor derivation and the derived economic impact? Have there been changes in Franchise or Excise taxes recently that might make the observed tax factors unreliable? Test it out and make sure it is reasonable.

23 3. Public Revenues vs. Public Costs Will the Project impose additional costs on the state? One approach involves estimating additional state expenditures related to New Worker Households New Business Activity Derive per household and per worker metrics to apply to project-specific calculations

24 3. Public Revenues vs. Public Costs

25 3. Public Revenues vs. Public Costs

26 3. Public Revenues vs. Public Costs Benefits accrue over a period of time Distributed with varying intensity across different levels of government Cost benefit report should cover multiple years 1 year won t tell the entire story A film strip not a snapshot Present value State and local taxes are the result of specific tax rates Single property tax bill many jurisdictions 8.25% sales tax not all to the state

27 4. Tax Credits & Incentives

28 4. Tax Credits & Incentives Tax credits or rebates affect the net fiscal benefit Work with department of revenue or other stakeholders to understand statutory tax exemptions. Sales and use tax exemptions on construction/equipment purchases Tax credits for job creation or investment Discretionary grants or incentives can be evaluated in an investment framework Incentive = Investment New Fiscal Benefit = Return on Investment Calculate Return on Investment and Payback Period

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30 Focus on Your Region

31 Focus on Your Region Economic Impact

32 Economic Impact Multiplier: 1.38 Focus on Your Region

33 Revenues & Costs

34 Revenues & Costs By Jurisdiction Over Time

35 Inputs & Key Assumptions Available

36 Revenues & Costs By Jurisdiction Over Time

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38 Paul Scheuren Impact DataSource