Economic Development 101 – Basics Concepts of Economic Activity

Over the past two months there have been a variety of reports about companies coming to Colorado and possible incentives offered to bring them to the state. These incentives are typically based on an estimate of the magnitude of fiscal and economic activity that will be derived by the company relocating, expanding, or staying in state.

There are many different models that can be used to measure economic impact. Impact studies can be conducted for companies, industries, or special events. One of the models frequently used in the state looks at five factors: payroll, construction, purchases, multiplier effect or secondary benefits, and visitor impacts. Economic activity is the sum these factors.

• Total payroll is a function of the number of employees and wages. In most cases, payroll is the largest
contributor to economic activity.
• Construction contributes to economic activity if new facilities are being added or if existing facilities have major or ongoing renovations.
• Purchases are a measure of the company’s local supply chain. For example, a company may purchase office supplies, cleaning services, or advertising expertise from local companies. As well, purchases may indicate the company’s contribution to the local tax base. Some incentives are based on the amount of taxes paid locally and may be granted to offset a portion of those taxes.
• Secondary benefits, or the multiplier effect, are an attempt to measure the indirect impact of the company.
Depending on the industry and company, the multiplier effect is often a significant portion of total activity. In
some cases they are considered to be “fuzzy” and some state agencies do not include them when calculating economic activity.
• Visitor impacts measure the spending of overnight visitors. They may include vendors, visiting experts,
attendees at conferences or meetings, or out of town employees. Typically, the visitor impacts are the smallest portion of economic activity; however, hotels or special events (bike races, stock shows, Super Bowls, World Series) will derive a majority of their economic activity from visitors.

There is also fiscal activity or taxes paid by the company and taxes paid by its employees. Fiscal activity is
almost always a subset of the economic activity. City, state, and local governments are particularly interested in how their bottom line will change as a result of a new company or event. Many incentives are based on a company’s fical activity.

Some impact analyses describe only the impact of a company or an event from the fiscal or economic activity
generated. It is more appropriate to also include the cost of government associated with services provided to the company or eent.

Finally, there are intangible benefits. This may include company or employee contributions to charities, donation of facilities for public meetings, or attraction of intellectual firepower that benefits the overall community.

There is merit in using a common model, such as the one described above, in evaluating economic activity; however, every project contributes to the economy in a different way and comparisons between projects and incentives are often difficult. The challenge comes in communicating the impacts of a company or event in a way that can be comprehended by decision makers.

©Copyright 2011 by CBER.

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