IMPACT OF ECONOMIC CHANGE ON LOCAL TAX REVENUES
        Local economic change will affect local tax revenues. Economic growth will cause local tax revenues to increase, and economic contraction will cause local tax revenues to decrease.
        Although there are many sources of local tax revenue, the two main sources are the local property tax and the local portion of the sales tax. To calculate the change in local sales tax revenue from economic change, simply multiply the estimation of the change in spending in the county from formula (1) by the local sales tax rate. In most counties of North Carolina, the local sales tax rate is 2%. Therefore, the calculation for the change in local sales tax revenue is:

(5)

total annual change in spending in county from formula (1)

×

0.02 (or local sales tax rate if different than 2%)

=

annual change in local sales tax revenue

        Two things should be remembered about this formula. First, the answer is an annual number. The estimate in the change in local sales tax revenue will occur each year; therefore, it is an annual number. Second, the change will be negative, that is, local sales tax revenue will fall, when the "total annual change in spending in county" is negative, and the change in local sales tax revenue will be positive when the "total annual change in spending in county" is positive.
        Calculating the change in local property tax revenue depends on the local property tax rate and the relationship between income change and property value change. The latter relationship can be quite complicated. However, for simplification we will assume that every dollar of income change will result in $2 of change in property values. This is based on the average relationship between income and property values that we observe in North Carolina. The formula for calculating the change in local property tax revenues resulting from economic change is thus:

(6)

total annual change in spending in county from formula (1)

×

2

×

local property tax rate per $1.00 of property value

=

annual change in local property tax revenue

        Again, the result is an annual number which occurs each year. Also, it is positive when the "total annual change in spending in county" is positive, and it is negative when the "total annual change in spending in county" is negative.

IMPACT OF ECONOMIC CHANGE ON LOCAL PUBLIC SPENDING
        Economic growth will also likely have an impact on local public spending. A positive relationship is generally seen between local public spending and population; that is, the more people in a community, the more local public spending for schools, police and fire protection, etc.
        Although there is a link between local population and local public spending, the link can be tricky. For example, some local facilities may be underutilized, meaning more people can be absorbed without increasing costs. Schools are a good example of this. Schools may be able to add some students without increasing the number of classes or constructing new schools.
        Also, communities may experience economies or diseconomies of scale in the provision of local public services as they get larger. When a very small community gets larger, it may find it can provide services more efficiently. In this case, the added cost per new resident will fall. But at the other extreme, when very large communities get even larger, those communities may find the costs per added resident rising.
        Despite the likely existence of these complicated relationships between community size and per capita local public spending, they are difficult to estimate. Therefore, in estimating the impact of economic growth on local public spending, simple average relationships will be used.
        Four kinds of impacts on local public spending will be shown: the impact on general local governmental spending, the impact on local social service spending, the impact on local public school operating spending, and the impact on local public school construction spending. Each of these are presented in turn.
        Economic growth, which results in new residents, will increase general local governmental spending. However, the reverse isn't necessarily the case. Economic decline which results in lost jobs won't reduce general local government spending unless residents leave the area. THEREFORE, THE FOLLOWING FORMULA FOR ESTIMATING THE IMPACT OF ECONOMIC CHANGE ON GENERAL LOCAL GOVERNMENT SPENDING SHOULD ONLY BE USED IN THE CASE OF ECONOMIC GROWTH:

(7)

total change in jobs in county, from formula (2)

×

proportion filled by new residents

×

annual change in local per capita

=

annual change in local public spending, exclusive of social services and schools

        The estimate of total new jobs is from formula (2). The percentage filled by new residents will have to be locally determined. Local per capita public spending should be based on all spending except those for social services and schools. School spending will be handled in other equations. Social service spending is omitted if it is expected that new job holders are self-supporting.
        The impact of economic change on local social service spending is handled separately because the impact will be the opposite of that for general spending. For economic growth which provides more jobs, local social service spending should fall. However, for economic decline which cuts jobs, local social service spending should rise. Therefore, the estimating equation is:

(8)

total change in jobs in country, from formula (2)

×

proportion filled by local residents

×

local per capita social service spending

=

annual change in local social service spending (put "-" for increase in jobs, and "+" for decrease in jobs)

        Again, the estimate of total new jobs is from formula (2), and the percentage of jobs filled by local residents will have to be provided locally.
        Although changes in the local population may not affect public school spending immediately, in the long run changes in the number of students, and particularly increases in students, will impact educational costs. The impact of increases in the number of students on long run local public school operating costs is estimated by formula (9). AGAIN, ONLY USE FORMULA (9) FOR ECONOMIC GROWTH. Don't use it for economic decline unless there is good reason to believe that laid-off workers will leave the area.

(9)

total change in jobs in county from formula (2)

×

proportion filled by new residents

×

2 children per resident

×

local school operating spending per student

=

change in annual spending per student

        The "2 children per resident" is obviously an assumption. If other information is available, substitute that information for this assumption.
        Finally, changes in local population, and particularly increases in local population, will cause increases in local school construction costs in the long run. These costs are estimated by:

(10)

total change in jobs in county, from formula (2)

×

proportion filled by new residents

×

2 children per new resident

×

local per student construction cost

=

new annual local spending on school construction

        In summary, for economic growth, use the following formulas to estimate the impact on local public spending: (7), (8), (9), and (10).
        However, for economic decline, only use formula (8) unless there's good reason to think that laid-off workers and others will leave the county.
        One question in the application of formulas (7) to (10) is what values to use for the various per capita spending amounts. If possible, current local values should be obtained. Local municipal and county governments can provide the latest per capita spending on general government and on social services. Likewise, the local public school district can give operating spending per student and construction costs per student for the latest school building projects. For the last measure, what is needed is the annual debt service payments per student housed in the new buildings.
        However, busy users of this publication may not have time to obtain these data. For this reason, average per capita values are given in Table 2. Users should recognize that these values may not directly correspond to their local situation. Also, the per capita amounts provided are the latest available. Users may want to inflate the values by a minimum of 3% annually to bring them up-to-date.
        Note that two general local government spending values are given, one for counties and one for municipalities. Municipality spending is much higher, on average, than county spending. As for which value should be used, the county amount should always be used since the economic change will take place somewhere in the county. If the economic change is expected to take place totally within municipalities in the county, then the SUM of the county and city per capita amounts (in Table 1, $531 + $1258, or $1789) should be used. But if the user thought that half the economic change would take place in the county and half in municipalities, then an average of the county amount and the county/city sum should be used. For example, this average would be [$531 + $1789]/2, or $1160.

Table 2. Average Per Capita Local Public Spending Values in North Carolina.

Local government per capita spending excluding social service spending a	county (93-94)	$531
	city (FY 92-93)	$1,258
Local government social per capita spending b	(FY 93-94)	$216
Local public school operating expenses per student expenses per student c	(FY 93-94)	$965
Local public school construction costs per student d	(1993-95)
	Borrowing interest rate	Annual Cost
	6%	$848
	7%	$917
	8%	$990
	9%	$1,064
	10%	$1,142
	11%	$1,221

^aCounty spending is from the North Carolina Association of County Commissioners, Fiscal Summary of North Carolina Counties, fiscal year 1993-94. City spending is from the North Carolina League of Municipalities, Fiscal Summary of North Carolina Municipalities, fiscal year 1992-93.
^bFrom North Carolina Association of County Commissioners, Fiscal Summary of North Carolina Counties, fiscal year 1993-94.
^cExcluding child nutrition costs. Source: Fiscal Research Office of the North Carolina General Assembly.
^dAnnual debt service costs per student based on a 20 year borrowing period. Based on construction projects for years 1993, 1994, and 1995. Source of construction data: Fiscal Research Office of the North Carolina General Assembly.