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Basics of the Fiscal Desktop Model
- 1. CEDBR Fiscal Benefit-CostModel 2010 - 2011 Kasey Jolly, Senior Research Economist Center for Economic Development and Business Research Wichita State University
- 2. History of Model Development Court of Tax Appeals (COTA) requires analysis for tax abatements and IRBs State model developed and funded by Kansas Inc. and Kansas League of Municipalities in 1993, but not kept up-to-date GWEDC provided funding for development of new model
- 3. Why was the new model developed? Old model outdated SIC not NAICS Other limitations Allow greater flexibility Local technical support Available for use throughout ED process
- 4. Two Versions of the Model Desktop Model Full Model Given to regional partners Returns output for City and County User Friendly CEDBR - $600 fee to run the model Returns output for City, County, State and School District Created to be flexible; therefore, more complex than Desktop model
- 5. Data Provided by CEDBR: Community Data Tax rates Mill levy rates Budget information Number of residents Number of employed residents Avg. market value of new residential property Avg. wage all jobs LOB (local option budget) mill levy rate LOB percentage of general budget Capital outlay mill levy rate Number of students General Fund Budget
- 6. Multipliers Calculated by the US Dept. of Commerce, BEA Measure the impact of business operations on other businesses in the community Measure the impact of payroll expenditures on other businesses in the community Direct, Indirect and Total jobs/and or payroll
- 7. Worker Spending Patterns A major source of revenue for taxing jurisdictions is retail sales taxes To account for these revenues, we must know what percentage of a company’s sales and purchases are subject to sales tax; it is also necessary to estimate these percentages for company employees/payroll Captured retail sales County – “County Pull Factors” (KSU) City – city pop. is divided by county pop. State – the model assumes 100% is subject to tax
- 8. Substitution Individual industries (each NAICS) have been given a predetermined substitution rate Rates were based on the nature of the industry: We have two types of industry: Base – brings outside dollars in Support – reshuffles existing dollars Base industries and support industries may look very different from one community to the next. In addition, specialization within the industry – specifically skill sets – impact substitution rates
- 9. Data Needed from Company NAICS code Capital investment Land, buildings, machinery and equipment Number of new jobs Average wages of new jobs Firm payments to the city or county
- 10. Data Needed from Community: Incentives Dollar value of incentives by type and taxing jurisdiction Tax abatement (years/percentage) Forgivable loan Training dollars Infrastructure improvement Cash value of all other incentives
- 11. Print Out Sheet Project summary Incentive summary Tax abatement parameters Construction impact Substitution Firm multipliers Economic impact of firm operations
- 12. Fiscal Impact – Presented Using 3 MeasuresReturn on investmentBenefit Cost RatioNet Present Value Benefits Costs Property Taxes Retail Sales Taxes Transient Guest Taxes Other Fees & Taxes Incentives Cost of providing city/county services
- 13. Limitations Quantitative vs. Qualitative Relies on information given to us The desktop version purposely underestimates benefits to the community Depending on the situation, can under- or over-estimate impacts Example – large capital expenditure with tax abatement may outweigh benefits seen from new jobs
Editor's Notes
- The model was created because the Court of Tax Appeals requires a benefit costs analysis before issuance of tax abatements and IRBsThe original fiscal policy model in Kansas was developed for the entire State. It was funded by Kansas Inc. and the Kansas League of Municipalities in 1993 but it was never kept up-to-date. The current model was funded by the GWEDC and is available to all regional partners. The full fiscal model can be used for any municipality in the state. The Center has worked towards expanding the use of the model throughout the state.The desktop model is provided to all users of the full model.
- So, why was the new model created?The old model was outdated. Some of the features that were outdated included the way school funding was done, the old model used SIC codes instead of NAICS codes and the model was not flexible and did not allow additions and updates very easily.The state model requires extensive amounts of information from applicants – our model includes all community data and the data is updated on annual basis.The new model allows flexibility. For example, I can do a tiered tax abatement rates (which was not an option in the older model).The new model also includes substitution rates (that CEDBR determined) by industry. Substitution rates explain new economic activity vs. reshuffling of economic activity – the old model did not have thisLocal technical support is available (which is myself) and because of this, the model is updated at least once a year with current tax rates, multipliers and other parameters or assumptions.And once again, the model is available for use throughout the economic development process – This allows economic developers to test and retest different scenarios making this a useful quantitative tool.
- There are two versions of this model.The first version is a limited, user-friendly version that is given to model users. It works almost identically to the full-version of the model, except it only returns output for the City and County. The desktop model generally ignores taxable corporate activities because most of these are state level revenues. This version is meant to be used in the economic development process by economic developers and should be viewed as a rough draft of the project.The full model is used by CEDBR. The full model returns output for the City, County, State and School District. This version of the model was created to be flexible and is therefore more complex than the desktop model. The full model includes detail that is not available to the desktop model such as firm sales or purchases and the revenue generated from those sales and purchases. If you compare output from a desktop version and a full version, you will notice that there are only slight differences. For all practical purposes, the full model is more accurate.
- Customized, timely, community data sets our model apart from “other” standard or commercial models. Most commercial models do not use ACTUAL city and county data inputs, instead they use national averages or disaggregate from national averages.The community data is the driver of this model.This is data that must be available to CEDBR in advance of model use. The data allows CEDBR to customize outputs to each taxing entity.It is possible to not have “current” information in the model – this is due to lags in data availability – Data can be updated when new information is provided, otherwise the model is updated in the spring each year. Data is collected from CEDBR databases and city and county budgets – or from the League of KS municipalities.We use this information to calculate tax revenues, confirm assumptions of marginal costs and benefits per employee and resident and other various measures.
- RIMS II multipliers from the Bureau of Economic Analysis, aggregated for the Wichita MSA, are used to calculate total economic impacts from an industry. The notion of a multiplier effect arises due to the interrelatedness of local industries. The initial infusion of new money into the community from construction creates several rounds of spending and re-spending. For example, Company X pays a construction company for work completed. That construction company pays an employee, who in turn buys goods and services from area companies, creating income for these companies, the indirect effect. Employees’ earnings purchase goods and services from other area companies, the induced effect. The total effect of the initial infusion is the sum of these direct, indirect and induced effects.This cycle of spending and re-spending continues until the initial infusion of new money is offset by leakages. Leakage occurs when money is spent outside the community or used to pay taxes. For example, at the local level, state taxes are a leakage. Likewise, the purchase of an automobile in Oklahoma by a Kansas resident would be a leakage. The main sources of leakages are savings, taxation and the purchase of imported goods. There are some zero multipliers – b/c industry does not exist in areaMultipliers take time to create an impact = this is not an instant fixThe size of the industry multiplier is based on whether the industry brings new dollars into the community or is reshuffling existing community dollars, the amount/concentration of the industry in the area and multiple other factors. A retail store will have a low multiplier – a manufacturer will have a high multiplier.Research indicates that input output models using RIMS II multipliers overestimate the impact of economic activity – this is true. To counter this, CEDBR created additional measures including calculating spending leakages and substitution.
- Spending leakages are calculated based on worker spending pattersn.A major source of revenue for taxing jurisdictions is retail sales taxes. To account for these revenues, we must know what percentage of a company’s sales and purchases are subject to sales tax; it is also necessary to estimate these percentages for employee payroll and construction expenditures.Captured retail sales are based on the following assumptions for each entity:County – “County Pull Factors” (KSU) (Dr. David Darling) (now done by the Kansas Department of Revenue) – Pull factors account for “leakages” or the amount of money that is typically spent outside a community. If you are a regional hub, your pull factor is greater than 1 and you bring outside dollars in – in other words, taxable expenditures are greater than your local income levels would dictate – meaning outside dollars are coming in. If you are not a regional hub, your pull factor is less than 1 – local incomes are going elsewhereCity – city pop. is divided by county pop. Making this a proportional measure. It is assumed that larger communities demand more funds/time/resources from the county than unincorporated areas. So, if no city sales tax rate, but a county rate, sales tax does create a benefit to the CITY and the county. The city gets a proportional amount of sales tax.State – the model assumes 100% is subject to tax – so all expenditures are state sale taxable – unless adjustments have been made otherwise
- Individual industries (each NAICS) have been given a predetermined substitution ratesSubstitution occurs when resources shift from one entity to another within a single industry. Depending on the industry under analysis, it is likely that a portion of the earnings and wage impact is a shift from one entity to another within the Wichita MSA, not net new earnings and wages.Exact locations of jobs are dependent upon the availability of employees, location of business and travel patterns of tourists. Rates are based on the nature of the industry:We have two types of industry:Base – brings outside dollars inSupport – reshuffles existing dollarsBase industries and support industries may look very different from one community to the next.In addition, specialization within the industry – specifically skill sets – impact substitution ratesSome industries are all 100% substitution including reatil, restaurants and entertainment industry.Some industries are all net new including MANUFACTURING and other base industry.
- Now, lets turn our focus to the data required to operate the model.The company data needed includes:NAICS codes – which are used to find substitution and multipliers for that specific companyCapital Investment information – which is used to determine sales tax, property tax, and construction salariesLand - will not have a property tax benefit in the model – we are looking at net new, therefore, existing land is already being taxedBuildings – this will have a property tax benefit/cost – this is net new and the full value of construction will be considered a net gain to tax rollsBuilding also creates construction salaries, retail construction good purchases and company profits – all of which are taxed accordinglyMachinery & equipment – this COULD carry a construction cost but does not have a net property tax benefit unlessALL of these assumptions can be manipulated based on individual projectsNumber of new jobs and their average wages – this is used to figure tax generations from employees – both income tax and retail sales taxThe number of new jobs coming from outside of the area will help to dictate the number of new homes purchased in the community and the associated tax revenuesFirm payments to city and county (payments in lieu of taxes)IN the FULL MODEL:New sales and purchases are used to determine additional taxes generated by the company and corporate income taxes.Visitors to the company are used to assess associated visitor spending including transient guest taxes.All of this information is outlined on the firm data sheet that is available on the Center’s website.
- The parameters of the incentives are also required to run the fiscal model.This includes tax abatements which are measured by the number of years and the percentage. It also includes forgivable loan dollars, training dollars or any other direct cash incentive. The desktop and fiscal model incentive pages are similar.In the full model, one can create multiple incentive options including: declining or staggered abatement rates of a time period and the like. This is not possible with the desktop model.This information is typically given by the respective city or county. This is where the model becomes a useful tool because you can experiment with various incentives to see what best fits the situation and community.
- Project summary – a summary of inputs (wages over 10 years, number of new jobs, capital investment)Incentive summary – provides the “cost” to the city and county based on each incentiveTax abatement parameters – number of years and the percentage usedConstruction impact – number of supported construction jobs and wages from the expansion projectSubstitution – provides the predetermined substitution rate for the industry – if you think the output is incredibly low check this rate first!Firm multipliers – the multipliers, determined by BEA, for the given industryEconomic impact of firm operations – economic impact describes the number of jobs and wages. This is a direct calculation of the number of initial jobs * the given multiplier = total jobs – the same is true for wages
- Fiscal benefits are different from Economic benefits. Fiscal benefits describe tax impacts to municipalities.BenefitsProperty – corporate capital investment, new employee homesRetail – corporate sales, purchases; new employee payroll; visitorsOther – new employees, new residentsTrans. – visitorsCostsIncentives – IRB, Forgivable Loan, Tax AbatementServices – New residents, new employeesROI – The annual rate of return, over the next 10 years, on each taxing entity’s investment in the company; in general, a rate of return in excess of the taxing entity’s cost of capital is considered desirableBCR – compares public benefits over a ten-year period from the new or expanding company to public costs during the same period; in general, a benefit-cost ratio of 1.3 to 1 is considered acceptable for taxing entity to grant incentives to a company – A 1.3 to 1 indicates that for every dollar spent by a taxing entity, the taxing entity receives the original dollar plus an additional 30 cents.NPV – this is the present values of benefits - taking inflation into account – we like to use a 10-year average for the annual inflation rate – in general, a positive present value indicates an acceptable investment