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Chapter 2
What Is Fiscal Impact Analysis?

As noted briefly above, fiscal impact analysis generally refers to efforts to estimate the budgetary effects of various types of land uses on local governmental jurisdictions or other local service providers. [4] There are many circumstances and situations for which a fiscal impact analysis might be prepared and a number of methodologies that might be employed. Since local government budgets are often influenced by numerous factors -- some directly related to land use and some not -- the seemingly simple question "What will be the effect of this development or land use on our taxes?" can raise complex issues.

In this section, we introduce some basic concepts related to fiscal impact analysis. Among them, we highlight the difference between project-level and cumulative analysis, the importance of the characteristics and location of development, and the lack of regulatory or other consistent standards for preparing fiscal impact analyses.


IN A NUTSHELL

A thorough fiscal impact analysis addresses the impact of development activity on both sides of a governmental budget. Like a coin, local budgets have two sides: revenues and expenditures. The fiscal impact is the difference between the revenues and expenditures generated by the proposed land use or development scenario. This is sometimes more precisely referred to as the net fiscal impact. If revenues are greater than expenditures, a project or scenario is described as having a positive fiscal impact. Should expenditures exceed revenues, a negative fiscal impact results. And, if revenues and expenditures are equivalent, the impact is said to be neutral.

A positive impact means that the surplus generated by the proposed project or scenario will allow local tax rates to be lowered, the level of locally funded services to increase, or a combination of the two. A negative impact means that the deficits generated by the project or scenario will require local tax rates to be increased, the level of locally funded services to be lowered, or both. A neutral impact means that there should be no project- or scenario-induced changes on tax rates or locally funded services. [5]


PROJECT-LEVEL VERSUS CUMULATIVE ANALYSIS

There are two instances in which a fiscal impact analysis is typically prepared. The first, and most common, is for an individual development project. Most such project-level analyses are prepared by or on behalf of a developer seeking regulatory approval for a project. A second instance is the evaluation of the cumulative impact of a jurisdiction-wide planning effort or development scenario. Unlike project-level analyses, the cumulative approach attempts to deal with all expected development within a jurisdiction over time. This distinction is important, because the fiscal impact of any particular development on a jurisdiction can also be affected by the rate, timing, and level of other development in the jurisdiction. In short, when it comes to the impact of development on local government budgets, the whole can often be different than the sum of the parts.


EFFECTS OF COMMUNITY CHARACTERISTICS

The fiscal impact of development depends not only on the characteristics of the development itself but also on the characteristics and service patterns of the community where it will be located. For example, a rapidly suburbanizing jurisdiction on the edge of a major metropolitan area might experience a different impact from a given development than would a rural area where most development consists of small, scattered parcels. And, for small communities, the initial impacts of development may be positive as greater service efficiencies are achieved. But, for larger communities that have already optimized their service efficiencies, additional development may be less fiscally positive or even negative.

Fiscal impacts can also be affected by local service patterns. For example, the fiscal impact of new development in states with overlapping municipal and county governments can be sensitive to whether the development occurs inside or outside of a county's incorporated municipalities.

Fiscal impact analysis in Vermont

Vermont is unusual in that, at least with respect to some developments, the state gives consideration of fiscal or economic impacts a formal status in a statewide process for evaluating land use and development. This process, embodied in a law known as Act 250, provides that land use decisions that have a significant impact beyond the boundaries of the local regulatory authority (such as decisions on large developments and certain developments near municipal or county boundaries) are subject to review by a regional commission, whose decisions are in turn subject to further review by a state-level environmental commission. This review may consider (among other factors) the economic and fiscal impacts of the proposed development on neighboring communities. If the impacts are found to be negative, they can serve as one of the bases for disapproval. In most other states and localities, the fiscal impact of a project may be influential but is not formally determinative in the consideration of proposed developments.


LACK OF STANDARDS

The lack of consistent standards for fiscal impact analyses can often present additional complicating factors. Only a few states or localities explicitly require a fiscal impact analysis as part of their formal zoning, permitting, or planning process. As a result, there are few formal procedures or requirements for the preparation of such analyses, and few such analyses are subjected to outside review or judicial scrutiny. Indeed, methodologies applied to analyze individual projects or development scenarios can be highly variable even within the same jurisdiction.


Whatever the regulatory environment, project-level fiscal analyses constitute by far the large majority of fiscal impact analyses. Since most are prepared by and for developers in support of applications for required project approvals or rezoning, it is not surprising that most also project a positive fiscal impact.



Notes

4. These may include cities, counties, towns and townships, school districts, special-purpose districts, water and wastewater service districts, and regional authorities. Sometimes state governments may also be affected.

5. Other factors, such as national or regional economic conditions, and national, state, or local policies independent of local development, can also have a significant impact on local fiscal outcomes. Most fiscal impact analyses try to hold these other factors constant in order to focus on the key variable of land use.

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