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Measuring Potential Benefits
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Defining Economic Impact Analysis
In the course of developing and implementing a trail-based economic
development program, you may find it necessary to prove the economic
benefits of trail recreation to local citizens and elected officials.
As with any major public sector investment, your community will want
quantifiable evidence that investing in recreational trails will create
economic value for the community. For this purpose, many communities
make use of an economic impact analysis as a tool to estimate
the magnitude of new economic activity that results from public spending.
An economic impact analysis measures the extent to which a given one-time
economic event or ongoing economic activity contributes to the economy
of a region of interest. Economic impacts from trails will include:
- building new trails (construction activity only), representing a
number of one-time economic events;
- spending directly associated with trail users (both motorized and
non-motorized), representing ongoing economic activity; and
- additional spending induced by spending from trail users, also known
as indirect economic impact.
The paragraphs below explain the theory behind economic impact analysis
and highlight key terms in red, boldface type.
Economic impact analysis determines
how long a dollar circulates within an economy before being exported elsewhere to purchase a good or service which
is unavailable locally. For example, if a tourist pays $50 for a room
in a hotel, some of those dollars will be used to pay the salaries of
hotel workers, who in turn will spend their wages to buy groceries.
The grocery store, in turn, will buy a share of its produce from local
farmers, and will pay the salary of a cashier who will buy a sofa from
a local furniture store. All of these rounds of spending are retained in the local economy.
This economic cycle continues indefinitely, but the more integrated
the economy, the longer it takes before the original expenditure is
leaked from the economy when dollars are spent elsewhere.
Some leakage occurs during each round of spending: the hotel
will spend a portion of the $50 for advertising in a national publication;
workers in the hotel may order clothing from a catalog wholesaler in
another city; and the grocery store may buy dry goods from a national
distributor.
A local economy's ability to avoid leakage is described by economic
multipliers. A multiplier calculates the additional
economic activity induced by a new economic event in terms of wages,
jobs, or output. For example, if the employment multiplier for the hotel
sector in a given county is 1.75, the opening of a new hotel with 100
net new employees will result in the creation of 75 additional jobs
elsewhere in the county. Similarly, if the total annual payroll of the
hotel is $1.0 million and the county's wages multiplier is 1.5, the
new jobs induced by the hotel will total $1.5 million in annual wages.
To help explain how economic impact works, the following diagram outlines
the various "rounds" of spending that will result from trail-related
activity. Imagine tourism as a pitcher of water and your local economy as
a pyramid of glasses. As tourist dollars pour into local
businesses in your economy, these businesses must, in turn, buy more
supplies and hire more employees. These suppliers and employees then
spend money at other local businesses, thus inducing further impacts.
Some dollars will be leaked from the economy during each step in the
process. The challenge of economic development is to minimize the leakage.
Methodological Issues to Consider
Economic impact analysis is a simple tool and its results can provide
potent arguments for or against a project. However, it is also easily
misused. Assumptions underlying an economic impact analysis must be
made carefully, to withstand public scrutiny. Key methodological issues
include the following:
- Identify a reasonable area of interest.
The U.S. Bureau of Economic Analysis (BEA) only determines multipliers
for counties, and not for cities or towns. Communities that adapt
county figures for local use often misstate the benefits.
- Establish reasonable cause and effect relationships.
Economic impact from a new trail results when one of two things
occurs: 1) when no comparable recreation experience previously existed
in the study area; and 2) when users spend money where there were
previously no opportunities to spend. New users and new businesses
would not have arrived but for the construction of a new trail.
- Distinguish total spending from net new spending.
For example, if snowmobile sales increase in the winter following
the construction of a trail, how much is due to the trail and how
much is simply due to a vibrant economy or above-average snowfalls?
- Account for one-time expenditures.
One-time expenditures, such as the money spent building the trail,
also generate economic benefits.
Modeling the Costs and Benefits of Trail Programs
The final step in measuring the potential impacts associated with trail
systems is to create an economic model. Small communities should seek
help from economic development specialists (i.e., the Institute for
Decision Making-see "Sources
of Assistance" for contact information), as many technical
issues must be considered. The analysis entails identifying and describing
all costs and benefits associated with the trails program, using both
quantitative and qualitative gauges. Considerations include:
- Projecting the number and origin of trail users. How many are visitors?
How many are local residents?
- Inventorying public support services and their capacity to accommodate
the expected trail users, such as safety, sewer, water, rest rooms,
streets, parking, etc.
- Determining whether private support services can be expanded too,
such as guide service, hotel and motel rooms, restaurants, transportation,
etc.
- Estimating tourist spending for different types of visitors (daytripper
vs. overnight) to calculate sales volume and estimating spending by
resident trail users that but for the trail would accrue elsewhere.
Benefits most commonly associated with trail-related spending are increased
local incomes and employment. Tax revenues may also increase, providing
tax relief to local residents if additional revenues exceed the costs
of providing additional public services. Any increase in the demand
for public services (for example, extra police or improved public rest
rooms), is a cost of trail development, as are the costs of promoting
the trail.
Beyond such quantifiable impacts, other impacts cannot be expressed
in dollars and cents. The impacts of these non-quantifiable factors
can be described qualitatively by using plus and minus signs, perhaps
using the public participation process to explore relative significance.
People may disagree about whether a consequence is positive or negative
(one person's thriving business district is another's traffic jam),
but the point is to think through consequences thoroughly in an open
forum. Since community support is key to the trail program's success,
consensus about expected impacts is crucial to determine whether to
proceed or revise the approach.
The final step is to choose and then apply economic multipliers. Small
communities that wish to use economic impact techniques to measure trail
systems' impact on local revenues can adapt multipliers from existing
national or regional studies to obtain a rough estimate; again, outside
help on these complex analyses is desirable. If no multipliers are available,
the relationship will probably fall within the range of 0.3 to 0.5.
In plain English, for every new dollar spent by trail users in your
community (by tourists, or as avoided leakage) all local government
entities will probably realize increased revenues totaling between 30
and 50 cents after the completion of all rounds of economic activity,
and including all inter-government transactions. The more integrated
the economy, the higher the multiplier will be, which favors urban over
rural areas. Rural areas offering products entailing a great deal of
local production labor (e.g., crafts) can also experience higher multipliers.
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