Fiscal Impact Analysis means the estimation of the net impact on government of a particular project. For example, suppose a certain housing development is being considered for approval by local government. The project will bring in additional tax revenue from the property tax but it will also impose additional cost on local government from the cost of education the children of the families which will live in the houses built in the development. There would be additional impacts on revenue besides the property taxes. In California the State levies a state sales tax which it shares with local governments. In the past the State sales tax was six cents per dollar of taxable sales. Of this six cents, one cent was returned to the locale where it was collected. If the sales tax was collected in an incorporated city the one cent was returned to that city. If the sales tax was collected in an unincorporated area of a county then the one cent was given to the county government. The collection of a tax by one level of government for another level of government is called a subvention. There are numerous other revenues besides the property and sales taxes that are affected by a new housing development.
Also a housing development affects the costs of other units of government besides the school district. Besides the school district there are the water district, sewer district, fire control district and organization providing police services that would be affected by the increased population due to the housing development.
Before considering a fiscal impact analysis in its full detail it is useful to see a highly simplified example to illustrate the nature of the analysis.
For this mini fiscal impact analysis only the school costs will be considered. It is assumed that there are 0.8 students per household. The cost to the district consists of operating costs and capital costs. The operating costs are $400 per student. The capital costs are $10 million for a new school which will handle 400 students. The computations for the fiscal impact analysis are given in the following table.
| Year | Houses Built | Cumulative Houses Built |
House Value | Property Tax |
Discount Factor @10% | Present Value of Property Tax |
|---|---|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 0 | 1.000 | 0 |
| 1 | 100 | 100 | 10,000,000 | 100,000 | 0.909 | 90,909 |
| 2 | 200 | 300 | 30,000,000 | 300,000 | 0.826 | 247,934 |
| 3 | 100 | 400 | 40,000,000 | 400,000 | 0.751 | 300,526 |
| 4 | 0 | 400 | 40,000,000 | 400,000 | 0.683 | 273,205 |
| 5 | 0 | 400 | 40,000,000 | 400,000 | 0.621 | 248,369 |
| 6 | 0 | 400 | 40,000,000 | 400,000 | 0.564 | 225,790 |
| 7 | 0 | 400 | 40,000,000 | 400,000 | 0.513 | 205,264 |
The discount factor for Year T is the amount of money that one would have to put in the bank at time 0 such that it grow to be worth $1 at time T. The discount factor can be computed by the formula
The present value of the property tax revenue brought in by the housing development of the seven year study period is $1,591,996.
The costs are computed by first computing the number of students based upon the cumulative number of houses and the assumed demographic ratio of 0.8 students per household.
| Year | Cumulative Houses Built | Students | Operating Costs | Construction Costs |
Discount Factor @10% | Present Value of Total Costs |
|---|---|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 1,000,000 | 1.000 | 1,000,000 |
| 1 | 100 | 80 | 32,000 | 0 | 0.909 | 29,091 |
| 2 | 300 | 240 | 96,000 | 0 | 0.826 | 79,339 |
| 3 | 400 | 320 | 128,000 | 0 | 0.751 | 96,168 |
| 4 | 400 | 320 | 128,000 | 0 | 0.683 | 87,426 |
| 5 | 400 | 320 | 128,000 | 0 | 0.621 | 79,478 |
| 6 | 400 | 320 | 128,000 | 0 | 0.564 | 72,253 |
| 7 | 400 | 320 | 128,000 | 0 | 0.513 | 65,684 |
The present value of all the costs above is $1,509,439. Thus the net fiscal impact of the project, the difference between the present value of the revenues and the present value of the costs is a positive $82,557. Therefore the housing project could go ahead without creating any need to impose increased taxes on the present residents of the school district.