Comparing Costs to Revenue for Local Governments

Introduction
Home building generates local economic impacts such as income and jobs for local residents, and revenue for local governments. It also typically imposes costs on local governments—such as the costs of providing primary and secondary education, police and fire protection, and water and sewer service. Not only do these services require annual expenditures for items such as teacher salaries, they typically also require capital investment in buildings, other structures, and equipment that local governments own and maintain.
 
This report presents estimates of the metro area impacts of building 100 single-family homes in Knox County, Tennessee. The local economic benefits generated by this level of home construction activity are reported in a separate NAHB document. This report presents estimates of the costs—including current and capital expenses—that new homes impose on jurisdictions in the area and compares those costs to the revenue generated. The results are intended to answer the question of whether or not, from the standpoint of local governments in the area, residential development pays for itself.

The comprehensive nature of the NAHB model requires a local area large enough to include the labor and housing market in which the homes are built. The local benefits captured by the model, including revenue generated for local governments, include the ripple impacts of spending and taxes paid by construction workers and new residents, which occur in an economic market area. For a valid comparison, costs should be calculated for the same area.
 
A local labor and housing market generally corresponds to a Metropolitan Statistical Area (MSA) as defined by the U.S. Office of Management and Budget (OMB). Based on local commuting patterns, OMB has identified the Knoxville MSA as a metro area consisting of eight counties (Anderson, Blount, Campbell, Knox, Loudon, Morgan, Roane, and Union) in the State of Tennessee. In this report, wherever the term local is used, it refers to the entire, eight-county metro area.
 
Costs Compared to Revenue
 
This section summarizes the cost-revenue comparisons. The relevant assumptions about the single-family homes built (including their average price, property tax payments, and construction-related fees incurred) are described in the NAHB report, The Metro Area Impact of Home Building in Knox County, Tennessee: Income, Jobs and Taxes Generated.
 
In the first year, the 100 single-family homes built in Knox County result in an estimated:
 
$4.2 million in tax and other revenue for local governments,
$290,000 in current expenditures by local government to provide public services to the net new households at current levels, and
$3.9 million in capital investment for new structures and equipment undertaken by local governments.
 
The analysis assumes that local governments finance the capital investment by borrowing at the current municipal bond rate of 3.76 percent.
 
In a typical year after the first, the 100 single-family homes result in:
 
$1.3 million in tax and other revenue for local governments, and
$580,000 in local government expenditures needed to continue providing services at current levels.
 
The difference between government revenue and current expenditures is defined as an “operating surplus.” In this, case the operating surplus generated during the first year is large enough to service and pay off all debt incurred by investing in structures and equipment at the beginning of the first year by the end of the first year. After that, future operating surpluses will be available to finance other projects or reduce taxes. After 15 years, the homes will generate a cumulative $21.8 million in revenue compared to $10.5 million in costs, including annual current expenses, capital investment, and interest on debt.
 
Click here for the full report