In the post World War II period when the U.S. manufacturing sector was expanding, most development efforts focused on attracting new industries. But as manufacturing growth subsided the retail and service economy rose to dominance. Economic developers, however, did not view retail as a viable strategy because low wages and the non-basic nature of retail yielded a perception that retail was not worth the effort.

The landscape tilted again, starting in the 1980s, when economic restructuring left the retail and service sectors as the only likely employment options for new workers and for those who lost jobs in other sectors. This crisis became especially acute in rural areas where the remaining retail sector suddenly became almost the only employer, a trend that continues today. Accordingly, for at least the last decade, economic developers have come to recognize the value of—indeed the need for—including retail and service as a vital part of their diverse strategies. As a corollary, all communities—especially those in rural areas—have come to recognize the critical role of the retail sector in “plugging the leaks” of dollars flowing out of the local economy.

The second trend, the increased use of incentives for retail development, has emerged during this recent time period as well. The rationale behind this trend is two-fold. First, developers and retail businesses have discovered that retail often does carry favorable wages, and (at least at the local scale) retail can provide a source of outside dollars into the community. While this effect is mitigated at the state scale, retail sector development also adds to the quality of life in ways that perhaps are less measurable, but are nonetheless significant. Second, many local and state governments rely heavily on retail sales taxes as a primary source of revenue. Suddenly, we have discovered that retail jobs have become important, retail wages are viewed as valuable, and retail sales are critical to the support of government services.

Just as suddenly, the convergence of these two trends gives rise to a more critical examination of the claims behind them. What is the value of the retail sector? What constitutes the local retail sector and what is its geographic extent? What retail development strategy should we pursue? What kinds of retail activity should we emphasize? How do I place a value on a specific retail project? What are the local economic benefits of a project? Are incentives worth while? How much is too much in terms of incentives.

These questions can be answered only through considerable research, some of which has become quite sophisticated. Two main segments of this research center on retail analysis by communities seeking to foster retail development and by businesses seeking the best location for their next establishment. Earlier this year, The Buxton Report published articles describing how communities and businesses go about their research (See the January, February, and April issues). A third area of research—impact analysis—not only supports these research efforts, but is gaining widespread usage because it helps answer the above questions. The rest of this article describes impact analysis, especially as it relates to retail development and the use of incentives.

What is Impact Analysis?

Impact analysis identifies the measurable effects associated with a specific activity in an area. The typical activity that is analyzed is a change in the economic structure of the area economy. This change might be in the form of a new business attraction project; creation of a new business; or the retention, expansion, or downsizing of an existing business. Sometimes, impact analysis is used not to measure change, but to quantify the value of an existing activity.

There are several types of research that fall under the general term “impact analysis.” These include:

Economic Impact Analysis
Revenue or Tax Impact Analysis
Fiscal Impact Analysis
Cost-Benefit Analysis
Environmental Impact Analysis
Socio-Economic Impact Analysis

In retail development, the most commonly used is fiscal impact analysis, but a true fiscal study also includes an economic and a revenue impact analysis. Fiscal impact analysis is a type of cost-benefit analysis that identifies both the tax benefits and the government outlays associated with a project, from the point of view of the governmental unit.

Why are Impact Studies Important?

There are several good reasons why impact studies are gaining acceptance in retail analysis:

1. Helps prioritize projects—From the economic developer’s point of view, impact analysis can help sort out which retail projects to pursue first. In other words, in the pleasant situation where there are multiple retail projects, the developer can focus on those which will yield the greatest economic advantage for the area.

2. Justifies accepting or rejecting a project—Experienced professionals develop a good visceral sense of a good project or a bad one. Impact analysis can provide the quantitative evidence to back up our intuition. In some cases a project—either good or bad—may be controversial or even have political overtones. Nothing beats hard numbers in making the case for a good project that could be resisted or for a bad project that seems favorable on the surface. In this case, impact analysis can provide considerable public relations value.

3. Helps identify level of incentives—Incentives represent additional cost over and above the ordinary government cost to serve a local business. As governments have begun to offer retail development inducements, major retail projects increasingly are seeking locational incentives. Out of consideration of the public interest, it is important that the total government costs do not exceed the total tax benefits. Impact analysis can help identify what that break-even point is.

How Is It Done?

Retail impact analysis is conducted using some or all of the following steps:

A. Identify the Economic Impact. Typically, this involves calculating the total employment and income effects of a project and then calculating the potential local sales the project generates. Total jobs include:

Employment created at the project itself (the direct impact),
Jobs created at other businesses that supply, serve, or purchase from the direct business (indirect impact), and
Jobs created in other parts of the retail and service sector as a result of spending by the direct and indirect employees (induced impact).

Indirect and induced impacts often are calculated using multipliers. We recognize that the total employment attributed to a project will end up as a larger number than just the direct employment, and this is the essence of the multiplier effect. However, the misuse of multipliers is a problem in impact analysis. The result is confusion at best, and wildly inaccurate results and consequent bad decisions at worst.

In general, retail and service sector projects do not generate large indirect impacts. The induced impacts may not be large either, but often they can be greater than the indirect. Bottom line, this means the multiplier for most retail projects will not be very large, and one should be skeptical of a multiplier greater than, say, 1.75-2.00 for the indirect and induced impacts combined. As an example, a multiplier of 2.00 means that for every direct job tied to the project, an additional indirect or induced job is generated, and this is not a likely outcome. Typical multipliers for retail are in the 1.10-1.50 range.

B. Calculate Project Sales Impact. As a corollary to these calculations, more emphasis should be placed on measuring the total retail sales the new project is likely to generate. Measurement should include any losses of sales at existing competitors locally and what share of total new sales is from outside the area. Another consideration is how much of the total new sales represent retail spending that previously has been “leaking-out” of the local economy. Eliminating this leakage means more dollars remain for a longer time locally, which adds to the area’s total wealth. Rural communities know all too well how damaging leakage is to their economy, and leakage reduction is an important part of the economic impact of a project. Retail businesses have to conduct this kind of sales impact analysis to determine if location in the area will generate sufficient sales to be profitable. However, economic developers seldom include the value of the reduced leakage in their analysis.

C. Identify the Tax Revenue Impact. Sales tax revenues are generated from the project itself as well as from local purchases by direct, indirect, and induced employees. These may be calculated fairly easily by any governmental unit that receives such taxes. However, additional revenues accrue from any income, real estate, and personal property taxes paid by the employees linked to the project. In addition, some jurisdictions benefit from additional user fees, license tag fees, gasoline taxes, etc. A true measure of the revenue benefits of a project should attempt to value all of these sources.

D. Identify Fiscal Impact. New and existing infrastructure, increased police and fire protection, and higher education expenses are costs that will result for any project. In many cases the additional costs are not great, but for some projects they can be substantial, especially if a package of incentives is included. Many community leaders and economists argue that these costs must be factored into any impact analysis.

E. Compare Revenues and Costs. Once the economic impact is identified and the governmental revenues and costs determined, a careful comparison of costs versus benefits is needed to properly assess a project. The most sophisticated approaches include a present value, time series analysis, and one that identifies a break-even point for payback of the public sector’s investment. This step often is overlooked or incomplete, but is especially critical when an incentives package is used.

Where Do I Get Help?

The above description of the process for conducting a retail impact analysis has been greatly simplified, but it probably still seems complicated. Not necessarily, but a thorough impact analysis does require some careful data-gathering and calculation. For this reason, many communities and economic developers rely on third party providers to do the work. Purchased software is available, and some online programs can help. When there is insufficient staff or financial resources, university and government research agencies often can conduct a study. Your choice of external assistance will depend on how much you are willing to spend, how quickly you need the results, and how often you conduct impact analysis.