Economic vs. Fiscal Impacts – What's More Important for Economic Developers? For Best Results, Estimate Both

Newspaper articles and press releases often describe business location or expansion deals in terms of jobs and average pay. Sometimes the economic output, usually in millions or better yet billions, is also touted to underscore the massive economic impact of a project. Jobs, salaries, and economic output are three common types of economic impacts used to describe activity and spending. These economic impacts are seemingly easy to digest and often impressive on their face, but only provide a glimpse at the project’s overall impact.

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Beyond these economic impacts, there are also fiscal impacts, or the additional revenues and costs incurred by public entities, representing how the specific economic activity will affect the bottom line of local and state governments. For example, economic impact might tell you how many jobs are created, but fiscal impacts consider how much those jobs will result in taxable spending, new residential property taxes, and also weighs out additional government costs such as the added expense of fire trucks having to dispatch more frequently to accommodate the larger population. With all the factors considered, fiscal impacts are typically more difficult to estimate and can be difficult to summarize in a headline.

From time to time, clients will ask us to prepare a study that estimates just the economic impact or just the fiscal impact of their project. Depending on the purpose, one of these impacts in isolation can be helpful but more often than not, we suggest estimating both economic and fiscal impacts together in the same study, as they provide a complete picture to the project or activity.
Many public economic development organizations are charged with some form of the directive seeking to “improve the quality of life for residents”. This can sometimes take the form of expanding the tax base, recruiting employers in x, y, or z industry, or creating jobs for local residents. Despite requiring a detailed analysis and more careful explanation, fiscal impacts can be more useful to economic developers in making or defending these decisions. The fiscal impact distills the capital investment, job creation, new spending power, indirect benefits, and population implications down to a single dollar figure from the perspective of local governments. This dollar amount can then be used as a proxy to measure a change in the quality of life or social welfare.

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Additionally, many economic development deals involve public support in the form of a tax exemption or non-tax incentive. Changes in the company’s tax obligation, such as tax exemptions, directly affect the fiscal impact and cannot be measured against pure economic impact.

Though fiscal impact tends to provide more useful information than economic impact for economic developers, economic impact is important as well. The consideration of economic impact is not only important insofar as it drives the fiscal impact, but it can also illuminate connections to existing areas of economic strength for a community or region. Economic developers often target businesses in a particular industry to help develop that sector in the community. Analyzing and understanding the economic impact and the effect on backward linked suppliers to the new business activity can be useful and extremely enlightening .

Ultimately, both economic and fiscal impacts are important. The consideration of economic impact can help aim economic development efforts to a specific type of outcome while a fiscal impact analysis provides a dollar amount to help you determine when to pull the trigger.

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