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REGIONAL ECONOMIC ISSUES W orking Paper Series Community Development-Fiscal Interactions: A Review of the Literature William H. Oakland and William A. Testa FEDERAL RESERVE BANK OF CHICAGO WP -1995/6 C o m m u n it y D e v e lo p m e n t - F is c a l In te r a c tio n s A R e v ie w o f th e L i t e r a t u r e William H. Oakland and William A. Testa* The relationships between business development and the community budget have important implications on several fronts. Through zoning decisions, impact fees, abatements and other vehicles, communities must often decide on the extent and terms with which businesses are supplied with sites for development. Such community decisions often hinge on thefiscal advantages and disadvantages that accompany business development. Advantages can arise from an enhanced local tax base and augmented revenues; fiscal disadvantage can derive from increased demands by business for local public services such as roads, police, fire, water, and sewers. In addition, business development may also give rise to added population pressures as workers follow job creation. Such population growth often has its own attendant service demands, especially for public schools. In the context of metropolitan areas, in which almost 80 percent of U.S. population now resides, the implications of local community decisions concerning business development extend well beyond the home community. *The authors are, respectively, assistant vice president at the Federal Reserve Bank o f Chicago and professor o f economics, Tulane University. This paper is drawn from a research project supported by the Metropolitan Planning Council and the Federal Reserve Bank o f Chicago. The materials and findings presented here are attributable to the authors and not to their respective employers. At the Federal Reserve Bank o f Chicago, David R. Allardice provided both direct assistance and program support The authors would like to thank the following people for research assistance: Virginia Caiison, Xiao Chen, Richard Kaglic, and Robert McNamara. Thanks also to Jerry Szatan for his work on project organization, and for helpful comments. The authors also received helpful comments from members o f the Regional Development Committee and the Technical Advisory Group o f the Metropolitan Planning Council. Guidance on publicly available data was given by the staff o f the Property Tax Division FRB CHICAGO Working Paper August 1995, WP-1995-6 1 of the Illinois Department of Revenue and the Illinois Department of employment services. Community business development decisions impact job opportunities throughout the metropolitan area because new businesses draw their workers from wide labor sheds. For the same reason, attendant population pressures arising from business development may impact both fiscal health and quality of life in neighboring communities who may ultimately play host to workers seeking proximity to newly created jobs. Despite the importance of the business development-local fiscal relationship, much more remains to be discovered about the behaviors of communities, population, and businesses in determining the pattern of land usage in our metropolitan areas. In moving toward a better understanding through more meaningful research, this paper reviews those studies that are relevant to community development-fiscal relationships. Fiscal impact studies The question of local government fiscal surplus or deficit attendant to land development has become so widely asked by local officials that an entire methodology and practice has been developed to facilitate specific inquiries and their circumstances. An extensive handbook is available to teach and assist those who would attempt to measure the fiscal impact associated with any particular property development (Burchell and Listokin 1993). This methodology has come to be known as "fiscal impact analysis", and itentails comparing the public service costs of land development in a particular use in relation to the public revenues to be derived from the property'sdevelopment. These latter-day repositories (Burchell and Listokin) of fiscal impact analysis trace back the roots of such analysis to the 1930s when it was first used to assess the efficacy of replacing urban slums with public housing. Over time, and especially with the massive wave of development which was unleashed afterWorld War II,fiscal impact analysis became the vogue of local planning commissions who sought to maximize the fiscal well-being of their local communities (e.g. Hoyt 1949) by finding the most lucrative targets for local development. Most early efforts at estimating fiscal impact were straightforward and crude. At the build-out phase of development, the direct service costs of development were measured and compared to the local property tax revenues. Service costs were usually estimated to be the average FRB CHICAGO Working Paper August 1995, W P-I995-6 2 costs of serving the type of population generally associated with the development. For example, at the build-out phase of a residential development, fiscal impact studies of yesteryear would have assumed that a specific number of households would reside in the community and these households were assumed to contain the current U.S. average number of school age children. The costs of educating these children would have been estimated at the historic average costs ofproviding elementary and secondary education in the community. Today, although many fiscal impact studies continue to be done in a similar crude fashion, Burchell and Listokin report significant leaps in the sophistication of fiscal impact methodology. Rather than presuming that new public services will be provided at existing average cost,marginal cost, which includes, forexample, costs ofadding infrastructure capacity, is obtained through data analysis and extensive interviews with community public officials. Similarly, modeling approaches are being employed whereby year-by-year streams of costs and benefits are projected from the development's inception until final buildout, thereby yielding a far more comprehensive and dynamic picture of fiscal costs and benefits. Regardless of the sophistication of the fiscal impact method, the finding of fiscal impact studies over all these decades has not changed dramatically. That finding is that, in most cases, there is a clear hierarchy of development usage. Generally speaking, and with important exceptions, commercial and industrial property appears to more than pay its way (Burchell and Listokin, 1993). For example, extensive studies of the impacts of individual developments, such as the Saturn plant, suggest that the local revenues of an industrial development exceed service costs by a factor of three (Bartik 1991 citing Fox and Neel 1987 and Bartik et al 1987). At the same time, low-tomiddle income single family housing is usually found to be a losing proposition. The constancy of this finding has even suggested to one popular journalist that attracting commercial and industrial development has become a matter of survival for elected officials. One popular journalist has characterized this common finding as being accepted wisdom among developers ofrealestate, "WHY ELECTED OFFICIALS FEEL THEY M U S T ENCOURAGE COMMERCIAL DEVELOPMENT OR DIE: For every $1.00 of tax revenue that comes in from a residential subdivision, as much as $1.22 goes out to provide services, especially schools. (By contrast, forevery $1.00 oftax revenue thatcomes infrom commercial development, atmost thirty-two cents is required in expenditures, usually for roads.)".1 FRB CHICAGO Working Paper August 1995, WP-1995-6 3 Statistical studies of fiscal impact With respect to thefinding that commercial and industrial property more than pays its own way, statistical studies from the economic and professional planning literature have tended to support the general tenor of fiscal impact studies. One recent statistical study examined 365 contiguous municipalities of northern New Jersey during the 1980s when the region gained 400,000 new jobs and 150,000 new residents (Danielson and Wolpert 1991). The study constructed several indices ofbenefitsforeach ofthecommunities—both fiscal and nonfiscal benefits— and examined whether growth injobs and population affected these indices. In general, employment growth was found to benefit local communities while population growth was largely detrimental. In particular, those affluent communities in the region that limited population growth were found to experience very favorable housing appreciation. With regard to fiscal benefits, own community employment growth significantly lowered property tax rates,while raisinglocal government revenues per capita. Enhancement of local government revenues has a somewhat ambiguous interpretation as a fiscal benefit because businesses may require increased public service expenditures including police and fire protection, thereby offsetting increased revenues which derive from an enhanced property tax base. Some ambiguity can be clarified by focusing on the growth of those public expenditures that are directly benefiting local residents, such as local school spending. While an educated workforce benefits the broader business sector to some degree, any particular business will not draw its labor force from the immediately surrounding suburb. Accordingly, school spending disparities at the community level largely benefit community residents rather than community businesses. In studying the educational spending decisions of communities in the Boston metropolitan area, Helen Ladd found that a greaterproportion ofcommercial and industrial property sends signals to local voters that they face a lower "tax price" for education (1975). That is, for every additional dollar spent by local government on education, part of the cost will be born by out-of-community persons associated with the business property.2 Fischel (1975) has found very similar results in examining school spending decisions in 56 Bergen County communities. In a recent study of the northern New Jersey area, community employment growth was found to FRB CHICAGO Working Paper August 1995, WP-1995-6 4 significantly increase school spending per pupil while, in contrast, population growth tended to suppress school spending (Danielson and Wolpert 1992). Economists question whether fiscalsurplus associated with property taxes paid by commercial/industrial development possibly distorts land use decisions. If business property tax bills exceed the marginal cost of a business moving to the community, as is the commonplace assumption of most fiscal impact analyses, inefficientlocation of industry will be the result. This resultfollows because firms will choose their location for "fiscal” or "pecuniary" reasons rather than for reasons reflecting spatial variations in costs derived from real features of the landscape and infrastructure. At the same time, the presence ofindustrial/commercial property may distortthe "price" toresidents ofvoting to consume those local public services that are financed by the property tax, thereby giving rise to inefficient (possibly too large) levels of local public service provision. During the 1970s, several economists rebutted arguments that local property taxation of business property gave rise to inefficient or suboptimal allocation of business capital and industry. In arguing that the property tax is, in fact, efficient with regard to firm location decisions, Fischel (1975), Fox (1978), and White (1975) posited that local communities use their land-use zoning powers to regulate aggressive entry of businesses into the community so that, through a process of competition among communities, the taxes paid by business are equated with the marginal sum of business service demands (costs) and environmental costs borne by the community. In doing so, entry control through zoning allows communities to create a marketplace for environmental noxiousness whereby the business firm implicitly compensates local communities (through property taxes) for development costs (both fiscal and environmental). As pointed out by White (1975), this marketplace may still be characterized by spillover costs and inefficiencies in land use. For example, because noxious firms may exert a very local geographic impact, communities may tend to site industries at the boundary and comers of their jurisdiction, thereby imposing costs on other communities while reaping potential fiscal windfalls. Implicit in thistheoretical argument of inter-community competition and land use restriction is the outcome that business tax payments must exceed the costs they impose on the host community in the form of higher service costs. Otherwise, business could not compensate the community for environmental FRB CHICAGO Working Paper August 1995, WP-1995-6 5 costs. Fischel provided empirical evidence that was consistent with this implication of the theoretical model. (Fischel 1975). In studying school spending and school tax payments by household in 56 Bergen Co., New Jersey, communities, he found that 70 percent of commercial and 52 percent of all industrial property tax payments benefited residents in terms of lower taxes and greater school spending per household. In particular, a hypothetical $1000 extra of commercial property was estimated to have resulted in $8.60 lower property tax payment per household, and an extra $8.10 in extra school spending per household. These results echo those conducted in a master's thesis over a sample of communities in Minneapolis-St. Paul (Litvack and Oates 1972). A subsequent study of 119 communities in the Minneapolis-St. Paul area from 1975-80 has found supporting evidence (McGuire 1987). In thatstudy, McGuire stratifiedfirms by theirdegrees of noxiousness, and found that, for a given dollar value of commercial property development, those communities experiencing growth of the more noxious types of firms tended to extract larger compensation by means of a greater falloff (or a lesser increase) in effective property tax rates. Contrary studies Not allempirical studieshave supported thehypothesis thatcommunity pursuit ofcommercial and industrial property isadvantageous. Julius Margolis (1956, 1957) examined both the real effective property tax rate of municipalities in the San Francisco Bay area in 1953-54 along with their total property value per resident. Margolis classified cities according to their intensity of commercial/industrial property land use, and then compared the distribution of property value and real tax rate by type of city. He found that "dormitory" cities (that is, those choosing to specialize in residential property) tended to display total property value per capita in excess of "balanced" cities (those being communities hosting both substantial nonresidential and residential property). Similarly, tax rates were found to be no higher in dormitory cities than in balanced cities. However, the Margolis evidence is far from compelling fortwo reasons. First,hisclassification scheme appears somewhat arbitrary and even slanted. In his comparisons, "industrial enclaves" are excluded. Yet there is no reason to treat such communities as anything more than nonresidential property-intensive communities. Perhaps more damaging, the Margolis studies examine tax rates over all property rather than on FRB CHICAGO Working Paper August 1995, WP-1995-6 6 residents only; yet fiscal benefits of business should be manifested only in residential property values. More recently, a study by the staff of the DuPage County Development Department has received much public attention for its implications that the growth of nonresidential property has exerted large effects on the fiscal situation in 133 communities. Specifically, the study finds that "both residential and nonresidential land uses exhibit significantimpacts on property tax levy impacts in DuPage County" and that "the areas of DuPage experiencing most rapid changes from residential to nonresidential land uses bear an additional service provision cost thattranslates into higher tax levies." While the results of the study have been interpreted by some as suggesting that nonresidential development has exerted a net fiscal burden, such an interpretation iswell beyond the design of the study. The DuPage study does not isolate tax payments by residential property payers, but rather attempts to explain all(both residential and nonresidential) property tax payments. Again, as in the Margolis studies, payments by nonresidential property cannot necessarily be interpreted as a burden to established residents; nonresidential property payments may be compensating or benefiting local residents through the property tax system. Moreover, the study examined the growth of tax levy in absolute dollar amounts (and not the "price" or "tax rate" effect of growth and development). Summary discussion Most individual fiscal impact case studies conclude that property taxes are lower (declining) incommunities where nonresidential property base ishigher (growing). Of course, individual circumstances and conditions vary widely. This is so to such an extent that the evaluation of specific cases of development to determine community impact has become a professional practice. Statistical studies also tend to suggest that, generally, there is an inverse relation between nonresidential development and property tax rates. However, many studies do not fully account for the interactions among important variables, including the possibility that the causation between tax rates and nonresidential property runs in both directions. Moreover, even if nonresidential property tax base tends to reduce residential property tax rates, caution should be exercised before concluding thatbusiness development pays itsown way from the overall fiscal perspective of the host community. Itmay FRB CHICAGO Working Paper August 1995, WP-1995-6 7 be possible thatnonproperty taxes bom by community residentsincrease atthe same time that property tax rates decline. Also, service demands by the business sector may be rising, thereby crowding out public services enjoyed by the community's households. Such crowding out isunlikely. The greatest demands on local governments are not usually for business type services but rather are for local schools. Here, studies find that school spending per pupil tends torisealong with increased nonresidentialtax base, suggesting thatthere are fiscal gains on the spending side of the ledger. Again, it appears on the face of itthat nonresidential property base tends to defray the costs of public servicesconsumed by households— namely localeducation—whilealsoallowing some reduction in residential property tax rates. However, conclusions with regard to any overall fiscal surplus must be tempered by other considerations. As suggested by Ladd (1975), property taxes nominally paid by commercial and industrial property may be partly borne by community residents through tax shifting. More importantly, such studies do not examine interactions of land use and development but,rather,limittheirinquiries to the direct impacts of own community business and population development. Land use interaction Even though the early studies criticizing the wisdom of attracting nonresidential property contained some methodological flaws, one critique of fiscal impact studies per se was very well founded (Margolis 1956;1957). In particular,fiscal impact studies—both numerical and the statistical—are only a partial accounting of impact. In addition to direct fiscal impact, there may be inter-relationships of land use which need to be considered, each of which has its own attendant fiscal impact. Retail stores attract customers; either by bringing them infrom afarover local roads, or they must have theircustomers living nearby. Similarly, factory and office jobs presumably may draw on a local labor force who, in turn, must be provided with public services including schools, roads, public safety, and sanitation. Early critics of industry-oriented community planning were skeptical that any particular community could be successful in attracting land uses having a net fiscal benefit (e.g. industrial) without also bringing in and hosting those land uses having a net fiscal loss (e.g. residential) (Margolis NTJ). Community use of zoning to exclude less desirable land uses, itwas believed, is incapable of withstanding pressures to convert to highervalued land uses which are economically tied to the original FRB CHICAGO Working Paper August 1995, WP’1995-6 8 land use target. And even ifexclusionary zoning were successful in doing so, the target land use could, in the process, become unprofitable from the standpoint of those landowners themselves who would not have economical access to laborers, shoppers, or certain business service inputs. It is also true of most studies to date that, for the most part, the impact of development on own community only isbeing measured, without considering whether own-community development policies such as zoning, selective tax abatement, or commercial/industrial attractionhave significantenvironmental or fiscal spillover impact on neighboring communities (Fox 1978). Consideration of these effects add much complexity to the mechanisms and outcomes of suburban development policies. Some communities may be quite successful in the use of their exclusionary zoning practices by bringing in those properties having a fiscalsurplus while excluding nonbeneficial property development. However, other communities may be caught unawares of the negative development spillovers resulting from actions by neighboring communities. For example, commercial development in one suburb may be accompanied by population influx into neighboring suburbs— along with attendantfiscalstressassociated with increased school and sanitation capacity. More generally, widespread "develop-as-you-please" practices amongst many neighboring suburbs could, while being rational from each individual community's viewpoint, give rise to fiscal or environmental overload for the suburbs as a group. Perhaps because of the puzzling and disappointing resultsof "develop-as-youplease” in many fast-growing suburban areas, questions of growth impacts have taken a new turn during the 1980s and 1990s. Many of those places whose residents commute outside oftheirown community forjobs and income have come to oppose growth in any and all forms. At least on the face of it, such communities are more concerned about quality of life and the physical environment than about fiscalsurplus accruing from commercial and industrial property. Motivated by this new or heightened community concern, along with a recognition that developments imply many complex interactions, some studies have begun to question the fiscal impact of overall growth and development rather than differentiating the fiscal impact of different types of development on the local fisc. Unlike earlier work, these studies often claim that the benefits and disbenefits of land-use interactions are fully recognized and measured. FRB CHICAGO Working Paper August 1995, WP-1995-6 9 Very recently, Black and Curtis (1993) have conducted a study of "the local fiscal effects of growth of commercial development over time" for towns and counties in Virginia. The authors conclude that both population growth and economic growth (jobs)increase revenue-generatingcapacity,and thatrevenue capacity is the primary determinant of local government expenditure levels. Since enhanced revenue capacity makes itpossible to increase expenditures without raising tax rates, the policy implication that the authors draw is decidedly pro-growth. The Black-Curtis study resultsare difficultto interpret in the same way that the authors do. The authors interpret greater local government spending asevidence offiscal surplusp e rs e simply because fiscal capacity isa prime determinant of government spending. This would seem to be something of a non se q u itu r because higher spending alone could reflect, eitherhighercosts (coupled with inelastic demand forpublic goods) or greater business service needs rather than fiscal surplus. If anything, one would presume that greaterfiscalcapacity would allow residentstoconsume or enjoy both greater public services A N D lower taxes. Accordingly, ifone observed lower tax rates directly, such evidence would be more convincing. However, the authors report no attempt to statistically associate population growth (or even fiscal capacity) with residential tax rates directly. For their method to have insight, increases in fiscal capacity must be measured net of the expenditure demands which are attendant to growth. Aside from these problems, even ifone agrees with theirfinding thatoverall "growth" isfiscally sound, the study does not address which particular mixture, ifany, of growth (commercial vs. industrial etc.) is most beneficial to the community or to society overall. Other recent growth-oriented studies by Ladd (1992,1993, and 1994) examine all local governments in 247(8) large countywide observations in the U.S. from 1978 to 1985. After controlling for growth in income, jobs, changing age distribution, and changing governmental responsibilities, itis found that population growth rates exceeding one percent per year exert a large and significant impact on per capita tax revenues and revenue per $100 ofpersonal income. Since Ladd finds that average tax rates go up, and since property taxes are paid by allresidents—both new and established, her evidence implies that the influx of new residents is associated with rising tax burdens for established residents. (Study controls are also in place to assure that the new tax revenues being observed are not being "exported" to nonresidents via taxation of the business sector). FRB CHICAGO Working Paper August 1995, WP-1995-6 10 Empirical work by Ladd (1992) also suggests thatpopulation exerts a negative fiscal impact in several ways. First, the costs of public services are found to have a "u-shape," that is costs per unit decline over low to moderate population densities, and raise thereafter. However, in contradiction to many engineering-type or planning studies, Ladd finds also that higher densities result in higher unit costs (after accounting for other demand side effects, including the effect of population itself). Secondly, in examining current spending (net of capital spending), Ladd (1992) also finds that high rates of population growth (at least in the short term) depress current spending and service levels. Apparently, rapidly populating communities find itdifficultto keep up with population-related rising service demands. Part of this puzzle is perhaps solved in a later work by the author (1994) in which it is found that, when population rises very rapidly, declining state shares of total statelocal spending for services are a prime culprit in accounting for declining levels of current services. In contrast, capital spending and interest payments rise more than proportionately. Overall, community spending per capita is found to rise along with population. From the business side of the development equation, itisnotable thatthe 1994 Ladd study includes variables which measure business demand for services (the ratio of countywide jobs by place-of-work, per capita). In this study, and in her 1993 study, it is found that business demands do increase overall spending growth even while population continues to significantly create fiscal pressures on residents. This latter finding cannot be taken as evidence that business does not "pay its own way" because greater spending may be accompanied by higher taxes paid by the business sector (that is, such taxes are exported outside the community). The Ladd study uses business demand (and also "tax price") as a control variable to show thatpopulation raisesfiscal pressure after taking account of the impacts that business development exerts on expenditures and on tax base. Broad-based approaches to the issue of growth and its fiscal impact, such as these, are promising in that they address the most serious shortcoming of the fiscal impact type of study; that being that one must account for the interactions among types of land use in understanding growth and development. However, such studies will perhaps become more compelling if the specific nature of the land use interactions are specified, tested, and verified. FRB CHICAGO Working Paper August 1995, WP-1995-6 11 D o jobs follow people? One of the earliest recognized interactions of land use associated with nonresidential development is that workers, other things equal, would prefer to live within a short-to-reasonable distance (driving time) to their place of employment. For example, the monocentric model oflarge urban areas, which has been developed by Richard Muth (1969) and others, posits thathouseholds maximize their well-being by choosing to locate at a distance from the city center (i.e. the job location) so as to trade off commuting time to the city center for more affordable housing (which is presumably at greater distance from city center). In context of studies of the fiscal impact of nonresidential development, this attraction of household location tojob location would seem to imply that, as land uses which increase job opportunities are developed, so too will the demand for housing in the vicinity of nonresidential development subsequently unfold over time. This suggests a dynamic whereby commercial development-and itsattendant fiscalbenefits—can potentially be followed by household growth-with itsown attendantfiscaldeficit. Insofar as the vicinity of labor force attraction likely includes an entire labor shed area (and exceeds the community itself), the spatial effect of this dynamic may be to encourage a geographically widespread development of both jobs and housing which does not necessarily have beneficial fiscal consequences over the long run. Most of the existing studies of the intraurban location ofjobs and people have been conducted, not by observing individual suburban communities or labor sheds themselves, but by observing central city jobs and people versus aggregate suburban jobs and people; or by examining the density ofjobs and people in city versus aggregate suburban areas in metro areas over time (Bradford and Kalejian 1973; Mills and Price 1984; Cooke 1978; Mills 1986; Palumbo, Sacks, and Waslenko 1990). Generally, these studies have found little evidence that people follow jobs; or ifthey do find that people follow jobs, the strength of the effect is less robust than the effect that jobs have followed people to the suburbs. Nonetheless, one recent study found that, by disaggregating industries into individual industries, suburban decentralization of population is enhanced by suburbanization of jobs in the transportation, communications, public utilities, and services sectors (Thurston and Yezer 1993). (Failure to find such effects in previous studies, itis suggested, may be due to over-aggregation of industries). FRB CHICAGO Working Paper August 1995, WP-1995-6 12 So too, studies of individual household behavior have been more convincing of the "people follow jobs” effect. Greenwood and Stock (1990) examined household migration into major metropolitan areas, and migration of household from city to suburb and suburb tocity within large U.S. metro areas during the 1950s, 1960s, and 1970s. Those authors found that suburban job opportunities attracted both high- and low-income households from the central city during the 1950s and 1960s, but discouraged such migration during the 1970s. Metro area immigrants were attracted by suburban jobs only for the 1970s. In a study of migration behavior of households in the San FranciscoOakland, and San Jose areas, Brown (1975) divided land area into 300 traffic zones to examine whether households tend to move closer to job locations. That study found that 28 percent of household experiencing a change ofjobs also moved to a new traffic zone with average savings of commuting time of 6.2 minutes. Studies using observations of individual communities within a single metropolitan area are uncommon, perhaps due to the difficulties of compiling such data sets. One early exception was conducted for a sample of 100 communities in the Chicago metro area during the 1950 to 1960 period (Steinnes and Fisher 1974). Interestingly, incontrast to the dominant research finding of the prior 20 years, the authors characterized the common thinking of that time as being that employment location affects or determines residential location, while residential location has no effect on employment location. The Steinnes-Fisher study contradicted the common wisdom of the time in finding little evidence that employment growth in a community was a prime causal factor of the community's own population growth. Potential spillover whereby population attraction could result from neighboring community job growth was not examined. One must jump ahead some 20 years before encountering a study wherein (1) individual communities within a metropolitan area are observed and (2) spillover impacts of neighboring job and population growth are examined. Luce (1994) investigated the simultaneous relationshipbetween intraurbanjob and population location for municipalities in the Philadelphia metropolitan area. Although the study is primarily interested in examining the effects of local tax and spending features on job and population location,the interactions of job and residential location are also determined as some of the important behavioral mechanisms of growth and land use in a metropolitan area. In that regard, itis found that labor force location issignificantly influenced by both FRB CHICAGO Working Paper August 1995, WP-1995-6 13 a municipality’s own employment, and also by the location of jobs within commuting distance (although the reverse impact of labor force on job location is,once again, found to be the stronger). Of additional interest isthe speed of adjustment of labor force to changed or ’’equilibrium” employment location. The statistical estimates suggest that within a 10-year period following a change in employment, 25 percent of the subsequent labor force or population adjustment will take place. These studies suggest a continuing interest on the part of economic analysts in the attraction of labor force in response to a community’sjob development. While the literature is still somewhat young, itappears that the causation of people-follow-jobs phenomenon is significant but weaker than the reverse causality ofjobs following laborforce. However, there have been only a very few studies conducted over a sample of communities within a single metropolitan area, and only the lateststudy has appropriately measured alljob creation which occurs within commuting distance of a community (ratherthan confining job measurement to the community itself). The importance of the job location-residence locationinteractionimpliesthatthese linkagesmay need to be accounted for in examining the fiscal impacts of business development. Concluding D iscussion To date, economic studies of the fiscal impact of community business development are not yet definitive. The weaknesses of the existing body of literature relate to (1) the direct linkages between business development and itshost community and (2) the indirectconsequences ofbusiness development which follow from land use interactions between business and residential land development. With regard to direct linkages, studies have not identified and distinguished the separate direct lines of causation running from business development to fiscal indicators. With regard to property tax rates, business development affects community expenditures (the numerator of tax rate) and also the tax base ( the denominator). Tax base impacts of business development are unambiguously positive from a fiscal perspective. In contrast, augmented expenditures are ambiguous: those expenditures representing services to business must be distinguishedfrom servicestoresidents. One methodological FRB CHICAGO Working Paper August 1995, WP-1995-6 14 solution has been taken by those studies that narrow the examination to the impact of business growth on the subset of services that are unambiguously residential at the local level, namely local education. Findings here seem to suggest that local school spending is higher, and property tax rates lower, in those communities that have chosen to be the domicile of business development. However, although local school expenditures are important, local government spending on other services are also significant so that the conclusions are not definitive. (Unfortunately, many local public services are not easily classifiable as benefitting local residents versus local business.) A different approach has recently been taken which identifies the effect of business development on tax base; and which identifies residential service demand as depending on community income and demographics (Oakland and Testa 1995). This framework allows any independent influence of business growth on community expenditures to be verified. While the Oakland-Testa results are still preliminary, it appears that business service demands do not overwhelm the beneficial influence of business development on community's tax base. With regard to the indirect linkages between business development and the community fisc, studies have long recognized that business development can be induced or be accompanied by residential development. Ifso, and ifsuch residential development gives rise to local fiscal strain,these indirect linkages of business development may negate direct fiscal advantages of community business growth. While many studies have addressed the land use interactions between residential and employment location decisions, until recently few studies have examined these behaviors within the context of suburban communities in which most U.S. population now resides. The Oakland-Testa framework and results suggest that there has been a significant pull of population toward employment location in Chicago suburbs during the 1980s. Employment growth tended to give rise to population pressures, while population growth was found, in turn, to give rise to local fiscal stress. Moreover, these population pressures were experienced not only by those communities where employment had increased, but also in surrounding communities where workers chose to commute to nearby jobs. Accordingly, individual community decisions regarding business development were found to have powerful potential impacts on neighboring communities. The weaknesses of existing studies, along with the promising resultsof recent statistical work, argue for further study of both direct and indirect linkages FRB CHICAGO Working Paper August 1995, WP-1995-6 15 between business development and both local fiscal health and land use decisions. The policy implications of such research are important on several fronts. First,local communities often have responsibilityformaking land use, public service, and tax abatement decisions with regard to business development. The fiscal calculus of these decisions affects community residents who are seeking low-cost yet abundant public services. In addition, the possibility that land use decisions encouraging business location have powerful impacts on neighboring communities lends added importance to a better understanding of the indirect linkages between business development and fiscal impact. While individual communities often decide whether or not to supply sites to for business development, the attendant impacts on job availability and on fiscal health may often fall on the remainder of a metropolitan area. FRB CHICAGO Working Paper August 1995. WP-1995-6 16 Footnotes ^oel Garreau, E d g e C i t y ,Doubleday, 1991. p. 465. 2Unlike the assumption of some statistical studies and most fiscal impact studies, itappears from Ladd’sstudy that localresidents comprehend that part of local taxes imposed on businesses are shifted forward to local consumers or backward to local wage earners or landowners. In their selection of property tax rates, communities act as if39-45 percent of the property taxes paid by industrial property are borne by such property rather than by local residents (Ladd 1975). References Bartik, Timothy, "The effects of property taxes and other local public fiscal policies on the intrametropolitan pattern of business location,” in I n d u s tr y L o c a t i o n a n d P u b l i c P o l i c y , Henry W. Herzog, Jr. and Alan Schlottmann, (eds.), Knoxville: The University of Tennessee Press, 1991. Bartik, Timothy, et al, "Saturn and state economic development," 2, 1987, pp. 29-40. F o ru m f o r A p p l i e d R e s e a r c h a n d P u b l i c P o l i c y ,Vol. Black, J. Thomas, and Rita Curtis, "The local fiscal effects of growth and commercial development over time," U r b a n L a n d ,January 1993, pp. 18-21. Bournet, Marlon G., "An empirical model of intrametropolitan population and employment growth," P a p e r s in R e g i o n a l S c i e n c e ,Vol. 73, No. 2, pp. 135152. Bradford, D., and H. Kelejian, "An econometric model of flight to the suburbs," J o u r n a l o f P o l i t i c a l E c o n o m y ,Vol. 81, 1973, pp. 566-589. Brown, "Changes in workplace of workplace and residence," J o u r n a l Vol. 41, 1975, pp. 32-39. o f th e A m e r i c a n I n s t i t u t e o f P la n n e r s , Burchell, Robert W., and David Listokin, The A s s e s s m e n t H a n d b o o k a n d M o d e l , Cambridge, MA: Urban Land Institute, D e v e lo p m e n t Im p a ct 1993. FRB CHICAGO Working Paper August 1995, WP-1995-6 17 Carlino, Gerald, and Edwin Mills, "Do public policies affect county growth?" ,Federal Reserve Bank of Philadelphia, July/August 1985. B u s in e s s R e v ie w Cooke, T., "Causality reconsidered: A note," J o u r n a l Vol. 5, 1978, pp. 538-542. o f U rb a n E c o n o m ic s , Danielson, Michael N., and Julian Wolpert, "Rapid metropolitan growth and community disparities," G r o w t h a n d C h a n g e ,Fall 1992, pp. 494-515. Danielson, Michael N., and Julian Wolpert, "Distributing the benefits of regional economic development," U r b a n S t u d i e s ,Vol. 28, No. 3, 1991, pp. 493-413. Downing, P. B., and R.D. Gustely, "The public service costs of alternative development patterns: A review of the evidence," in L o c a l S e r v i c e P r i c i n g P o l i c i e s a n d T h e i r E f f e c t s o n U r b a n S p a t i a l S t r u c t u r e ,Vancouver: University of British Columbia, 1977. DuPage County Development Department Planning Divsion, I m p a c t s o f for the DuPage County Regional Planning Commission, October 9, 1991. D e v e l o p m e n t o n D u P a g e C o u n t y P r o p e r t y T a x e s , prepared Fischel, W., "Fiscal and environmental considerations in the location of firms in suburban communities," inF i s c a l Z o n i n g a n d L a n d U s e C o n t r o l s ,E.S. Mills and Wallace E. Oates (eds.), Lexington Books, MA: 1975. Fox, William F. "Fiscal differentials and industrial location: Some empirical evidence," U r b a n S t u d i e s ,Vol. 18, pp. 105-111. _________________,"Local taxes and industriallocation," P u b l i c Q u a r t e r l y ,Vol. 6, 1978, pp. 93-114. F in a n c e Fox, William F.,and C. Warren Neel, "Saturn: The Tennessee lessons," F o r u m 2, 1987, pp. 7-16. f o r A p p l i e d R e s e a r c h a n d P o l i c y ,Vol. Garreau, Joel, E d g e C i t y ,New York: Doubleday, 1991. Greenwood, Michael J.,M i g r a t i o n a n d New York: Academic Press, 1981. E c o n o m i c G r o w t h in th e U n i t e d S t a t e s , Greenwood, Michael J., and Richard Stock, "Patterns of change in the intrametropolitan location of population, jobs, and housing 1950 to 1980," J o u r n a l o f U r b a n E c o n o m i c s ,Vol. 28, No. 2, Sept. 1990, pp. 243-276. FRB CHICAGO Working Paper August 1995, WP-1995-6 18 Hoyt, Homer Associates, E c o n o m i c S u r v e y o f t h e L a n d U s e s o f E v a n s t o n for the Evanston Plan Commission, September 1949. I l l i n o i s ,prepared Kain, John F., ’’The distribution and movement ofjobs and industry,” in T h e (ed.), Cambridge, MA: Harvard University Press, 1968. M e t r o p o l i t a n E n i g m a ,J. Wilson, Ladd, Helen F., ’’Land use and tax policy," prepared for the Lincoln Institue of Land Policy, August 1992 (revised draft). _________________, "Fiscal impacts of local population growth, a conceptual and empirical analysis," R e g i o n a l S c i e n c e a n d U r b a n E c o n o m i c s , forthcoming 1994. _________________, "Population growth, density, and the costs of providing public Services," U r b a n S t u d i e s ,Vol. 29, No. 2, 1992, pp. 273-95. _________________,"Effects ofpopulation growth on local spending and taxes," R e s e a r c h in U r b a n E c o n o m i c s ,Vol. 9, 1993, pp. 181-223. _________________,"Local education expenditures, fiscal capacity, and the composition of the property tax base," N a t i o n a l T a x J o u r n a l ,Vol. 28, No. 2, June 1975. Ladd, Helen F., and Katherine L. Bradbury, "City taxes and property tax bases," N a t i o n a l T a x J o u r n a l ,Vol. 41, pp. 503-523. 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FRB CHICAGO Working Paper August 1995, WP-1995-6 19 Margolis, Julius, "Municipal fiscal structure ina metropolitan region," J o u r n a l 64, June 1957, pp. 226-236. o f P o l i t i c a l E c o n o m y ,Vol. _________________,"On municipal land policy forfiscalgains," N a t i o n a l T a x J o u r n a l ,Vol. 9, Sept. 1956, pp. 247-257. _________________, "The variation of property tax rates within a metropolitan region," N a t i o n a l T a x J o u r n a l ,Vol. 9, Dec. 1956, pp. 326-330. _________________,"Municipal fiscalstructureinametropolitanregion," J o u r n a l o f P o l i t i c a l E c o n o m y ,Vol. 64, June 1957, pp. 226-236. McDonald, John F., "Local property tax differences and business real estate values," J o u r n a l o f R e a l E s t a t e F in a n c e a n d E c o n o m i c s ,Vol. 6, 1993, pp 27787. McGuire, Therese J., "The effect of new firm locations on local property taxes," J o u r n a l o f U r b a n E c o n o m i c s ,Vol. 22, Sept. 1987, pp. 223-229. 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Yezer, "Causality in the suburbanization ofpopulation and employment," J o u r n a l o f U r b a n E c o n o m i c s , Vol. 35, No. 1, January 1994, pp. 105-118. ________________ ,Bureau of the Census, C e n s u s o f P o p u l a t i o n ,1 9 9 0 . White, Michelle J., "Firm location in a zoned metropolitan area," in F i s c a l a n d L a n d U s e C o n t r o l s , Edwin Mills and Wallace Oates (eds.), Lexington, MA: Lexington Books, 1975. Z o n in g _________________, "Property taxes and firms location," in S t u d i e s in S t a t e a n d L o c a l P u b l i c F i n a n c e ,Harvey S. Rosen (eds.). Chicago: University of Chicago Press, 1986. FRB CHICAGO Working Paper August 1995. WP-1995-6 21 W orking Paper Series A series of research studies on regional economic issues relating to the Seventh Federal Reserve District, and on financial and economic topics. REGIONAL ECONOMIC ISSUES Estimating Monthly Regional Value Added by Combining Regional Input With National Production Data WP-92-8 P h ilip R . I s r a ile v ic h a n d K e n n e th N . K u ttn e r Local Impact of Foreign Trade Zone WP-92-9 D a v i d D . W e is s Trends and Prospects for Rural Manufacturing WP-92-12 W illia m A . T e s ta State and Local Government Spending-The Balance Between Investment and Consumption WP-92-14 R ic h a r d H . M a tto o n Forecasting with Regional Input-Output Tables WP-92-20 P .R . I s r a i l e v i c h ,R . M a h i d h a r a ,a n d G .J .D . H e w i n g s A Primer on Global Auto Markets WP-93-1 P a u l D . B a lle w a n d R o b e r t H . S c h n o rb u s Industry Approaches to Environmental Policy in the Great Lakes Region WP-93-8 D a v i d R . A l l a r d i c e , R i c h a r d H . M a t t o o n a n d W i l li a m A . T e s t a The Midwest Stock Price Index-Leading Indicator ofRegional Economic Activity WP-93-9 W illia m A . S tr a u s s Lean Manufacturing and the Decision to Vertically Integrate Some Empirical Evidence From the U.S. Automobile Industry WP-94-1 T h o m a s H . K lie r Domestic Consumption Patterns and the Midwest Economy WP-94-4 R o b e r t S c h n o rb u s a n d P a u l B a lle w 1 Workingpaperseriescontinued To Trade or Not to Trade: Who Participates in RECLAIM? WP-94-11 T h o m a s H . K lie r a n d R ic h a r d M a tto o n Restructuring & Worker Displacement in the Midwest WP-94-18 P a u l D . B a lle w a n d R o b e r t H . S c h n o rb u s Financing Elementary and Secondary Education in the 1990s: A Review of the Issues WP-95-2 R ic h a r d H . M a tto o n Community Development-Fiscal Interactions: A Review of the Literature WP-95-6 W i l l i a m H . O a k l a n d a n d W i l li a m A . T e s ta ISSUES IN FINANCIAL REGULATION Incentive Conflict in Deposit-Institution Regulation: Evidence from Australia WP-92-5 E d w a r d J. K a n e a n d G e o r g e G . K a u fm a n Capital Adequacy and the Growth of U.S. Banks WP-92-11 H e r b e r t B a e r a n d J o h n M c E lr a v e y Bank Contagion: Theory and Evidence WP-92-13 G e o r g e G . K a u fm a n Trading Activity, Progarm Trading and the Volatility of Stock Returns WP-92-16 J a m e s T. M o s e r Preferred Sources of Market Discipline: Depositors vs. Subordinated Debt Holders WP-92-21 D o u g la s D . E v a n o ff An Investigation of Returns Conditional on Trading Performance WP-92-24 J a m e s T. M o s e r a n d J a c k y C . S o The Effect of Capital on Portfolio Risk atLife Insurance Companies WP-92-29 E l i j a h B r e w e r II I ,T h o m a s H . M o n d s c h e a n ,a n d P h i l i p E . S t r a h a n 2 Workingpaperseriescontinued A Framework forEstimating the Value and InterestRate Risk of Retail Bank Deposits D a v i d E . H u t c h is o n , G e o r g e G .P e n n a c c h i WP-92-30 Capital Shocks and Bank Growth-1973 to 1991 WP-92-31 H e r b e r t L B a e r a n d J o h n N . M c E lr a v e y The Impact of S&L Failures and Regulatory Changes on the CD Market 1987-1991 WP-92-33 E lija h B r e w e r a n d T h o m a s H . M o n d s c h e a n Junk Bond Holdings, Premium Tax Offsets, and Risk Exposure atLife Insurance Companies WP-93-3 E lija h B r e w e r I I I a n d T h o m a s H . M o n d s c h e a n Stock Margins and the Conditional Probability of Price Reversals WP-93-5 P a u l K o f m a n a n d J a m e s T. M o s e r IsThere Lif(f)e After DTB? Competitive Aspects of Cross Listed Futures Contracts on Synchronous Markets WP-93-11 P a u l K o f m a n , T o n y B o u w m a n a n d J a m e s T. M o s e r Opportunity Cost and Prudentiality: A RepresentativeAgent Model ofFutures Clearinghouse Behavior H e r b e r t L B a e r , V i r g i n i a G .F r a n c e a n d J a m e s T. M o s e r WP-93-18 The Ownership Structure ofJapanese Financial Institutions WP-93-19 H esn a G en ay Origins of the Modem Exchange Clearinghouse: A History of Early Clearing and Settlement Methods atFutures Exchanges WP-94-3 J a m e s T. M o s e r The Effect of Bank-Held Derivatives on Credit Accessibility WP-94-5 E l i j a h B r e w e r III, B e r n a d e t t e A . M i n t o n a n d J a m e s T. M o s e r Small Business Investment Companies: Financial Characteristics and Investments WP-94-10 E lija h B r e w e r II I a n d H e s n a G e n a y 3 W orking paper series continued Spreads, Information Flows and Transparency Across Trading System WP-95-1 Paul Kofinan and James T. Moser The Cultural Affinity Hypothesis and Mortgage Lending Decisions WP-95-8 William C. Hunter and Mary Beth Walker M A C R O E C O N O M I C ISSUES An Examination of Change in Energy Dependence and Efficiency in the Six Largest Energy Using Countries-1970-1988 WP-92-2 Jack L. Hervey Does the Federal Reserve Affect Asset Prices? WP-92-3 Vefa Tarhan Investment and Market Imperfections in the U.S. Manufacturing Sector WP-92-4 Paula R. Worthington Business Cycle Durations and Postwar Stabilization of the U.S. Economy WP-92-6 Mark W. Watson A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues WP-92-7 and Recent Performance James H. Stock and Mark W. Watson Production and Inventory Control atthe General Motors Corporation During the 1920s and 1930s WP-92-10 Anil K Kashyap and David W. Wilcox Liquidity Effects, Monetary Policy and the Business Cycle WP-92-15 Lawrence J . Christiano and Martin Eichenbaum Monetary Policy and External Finance: Interpreting the Behavior of Financial Flows and Interest Rate Spreads WP-92-17 Kenneth N. Kuttner Testing Long Run Neutrality WP-92-18 Robert G. King and Mark W. Watson 4 W orking p ap er series continued A Policymaker's Guide to Indicators ofEconomic Activity WP-92-19 Charles Evans, Steven Strongin, and Francesca Eugeni Barriers to Trade and Union Wage Dynamics WP-92-22 Ellen R. Rissman Wage Growth and Sectoral Shifts: Phillips Curve Redux WP-92-23 Ellen R. Rissman Excess Volatility and The Smoothing of Interest Rates: An Application Using Money Announcements WP-92-25 Steven Strongin Market Structure, Technology and the Cyclicality of Output WP-92-26 Bruce Petersen and Steven Strongin The Identification ofMonetary Policy Disturbances: Explaining the Liquidity Puzzle WP-92-27 Steven Strongin Earnings Losses and Displaced Workers WP-92-28 Louis S. Jacobson, Robert J. LaLonde, and Daniel G. Sullivan Some Empirical Evidence of the Effects on Monetary Policy Shocks on Exchange Rates WP-92-32 Martin Eichenbaum and Charles Evans An Unobserved-Components Model of Constant-Inflation Potential Output WP-93-2 Kenneth N. Kuttner Investment, Cash Flow, and Sunk Costs WP-93-4 Paula R. Worthington Lessons from the Japanese Main Bank System forFinancial System Reform in Poland WP-93-6 Takeo Hoshi, Anil Kashyap, and Gary Loveman Credit Conditions and the Cyclical Behavior of Inventories WP-93-7 Anil K. Kashyap, Owen A. Lamont and Jeremy C. Stein 5 W orking p a p er series continued Labor Productivity During the Great Depression WP-93-10 Michael D. Bordo and Charles L. Evans Monetary Policy Shocks and Productivity Measures in the G-7 Countries WP-93-12 Charles L Evans and Fernando Santos Consumer Confidence and Economic Fluctuations WP-93-13 John G. Matsusaka and Argia M. Sbordone Vector Autoregressions and Cointegration WP-93-14 Mark W. Watson Testing for Cointegration When Some of the Cointegrating Vectors Are Known WP-93-15 Michael T. K. Horvath and Mark W. Watson Technical Change, Diffusion, and Productivity WP-93-16 Jeffrey R. Campbell Economic Activity and the Short-Term Credit Markets: An Analysis of Prices and Quantities WP-93-17 Benjamin M. Friedman and Kenneth N. Kuttner Cyclical Productivity in a Model of Labor Hoarding WP-93-20 Argia M. Sbordone The Effects of Monetary Policy Shocks: Evidence from the Flow ofFunds WP-94-2 Lawrence J. Christiano, Martin Eichenbaum and Charles Evans Algorithms for Solving Dynamic Models with Occasionally Binding Constraints WP-94-6 Lawrence 7. Christiano and Jonas D.M . Fisher Identification and the Effects of Monetary Policy Shocks WP-94-7 Lawrence J. Christiano, Martin Eichenbaum and Charles L Evans Small Sample Bias in G M M Estimation of Covariance Structures WP-94-8 Joseph G. Altonji and Lewis M. Segal 6 W orking p ap er series continued Interpreting the Procyclical Productivity ofManufacturing Sectors: External Effects ofLabor Hoarding? WP-94-9 Argia M. Sbordone Evidence on Structural Instability in Macroeconomic Time Series Relations WP-94-13 James H. Stock and Mark W. Watson The Post-War U.S. Phillips Curve: A Revisionist Econometric History WP-94-14 Robert G. King and Mark W. Watson The Post-War U.S. Phillips Curve: A Comment WP-94-15 Charles L Evans Identification of Inflation-Unemployment WP-94-16 Bennett T. McCallum The Post-War U.S. Phillips Curve: A Revisionist Econometric History Response to Evans and McCallum WP-94-17 Robert G. King and Mark W. Watson Estimating Deterministic Trends in the Presence of Serially Correlated Errors WP-94-19 Eugene Canjels and Mark W. Watson Solving Nonlinear Rational Expectations Models by Parameterized Expectations: Convergence to Stationary Solutions WP-94-20 Albert Marcet and David A . Marshall The Effect of Costly Consumption Adjustment on Asset Price Volatility David A . Marshall and Nayan G. Parekh The Implications of First-Order Risk Aversion for Asset Market Risk Premiums WP-94-21 WP-94-22 Geert Bekaert, Robert J. Hodrick and David A. Marshall Asset Return Volatility with Extremely Small Costs ofConsumption Adjustment David A. Marshall WP-94-23 7 W orking p ap er series continued Indicator Properties of the Paper-Bill Spread: Lessons From Recent Experience WP-94-24 Benjamin M. Friedman and Kenneth N. Kuttner Overtime, Effort and the Propagation ofBusiness Cycle Shocks WP-94-25 George J. Hall Monetary policies in the early 1990s~reflections of the early 1930s WP-94-26 Robert D . Laurent The Returns from Classroom Training forDisplaced Workers Louis S. Jacobson , Robert J . LaLonde and Daniel G. Sullivan WP-94-27 Isthe Banking and Payments System Fragile? WP-94-28 George J ’ Benston and George G. Kaufman Small Sample Properties of G M M forBusiness Cycle Analysis WP-95-3 Lawrence J. Christiano and Wouter den Haan The Fed Funds Futures Rate as a Predictor of Federal Reserve Policy WP-95-4 Joel T. Krueger and Kenneth N. Kuttner Capital Utilization and Returns to Scale WP-95-5 Craig Burnside , Martin Eichenbaum and Sergio Rebelo 8