NRPA Measuring Impact of Park & Rec

39 Measuring the Economic Impact of Park and Recreation Services www.NRPA.org National Recreation and Park Association © 2010 All Rights Reserved Because local government revenue from taxes and fees is likely to be immediately expended back into the local economy for services the local government provides, this money is considered to remain a source of local stimulus. However, in the case of non-local interindustry purchases, non-local household income, and non-local government leakages (Exhibit 4-1), the direct revenue leaks out of the city and does not contribute any stimulus to the jurisdiction’s economy. Also, some of the direct household income received by local residents may not be spent in the local economy. Rather, some of it may be saved, in which case it contributes nothing further to local economic stimulus (Exhibit 4-1). As far as the community is concerned, saving the household income received is similar to spending it outside the community. The effect is the same in that the economic stimulus potential is lost. Exhibit 4-1 also shows potential leakage from some household income being spent outside the lo- cal jurisdiction on non-local household purchases. Some of the leakage shown in Exhibit 4-1 may not, in fact, be lost to the community. For example, it is possible that employees who reside outside the jurisdiction may spend some of their money within its boundaries, especially if the community is a major retail center for the area. This return of leaked funds is not shown in Exhibit 4-1 for two reasons. First, it is likely to be relatively small in many cases; second, it was concluded that including it in the figure would complicate rather than expedite communication of the multiplier principle. One of the unknowns is the time it takes for new money to be spent and respent as it circulates through an economy. Does it take a year for the full impact to be realized, or less, or does it take many years (Power, 1988)? Certainly, there is likely to be a time lag before the full impact of new spending is complete and it may have relatively little impact in the short term. A key feature in people’s understanding of the multiplier that is often overlooked is the potential for substantial leakage at each cycle of the multiplier as proportions of the new money go to pay salaries or taxes or to buy goods and services from people or entities located outside the city. Only those dollars remaining in the host community after leakage has taken place constitute the net economic gain. Constituent Elements of a Multiplier The three constituent elements of a multiplier are direct effects, indirect effects, and induced effects. It was noted above that visitors’ initial expenditures are likely to go through numerous rounds as they seep through the economy, with portions of them leaking out each round until they decline to a negligible amount. These subsequent rounds of economic activity reflecting spending by local interindustry purchas- es and local government revenues are termed indirect impacts. The proportion of household income that is spent locally on goods and services is termed an induced impact, which is defined as the increase in economic activity generated by local consumption due to increases in employee compensation, proprietary income, and other property income. The indirect and induced effects together are frequently called secondary impacts . In summary, the three elements that contribute to the total impact of a given initial injection of expenditures from out-of-town visitors are: Direct Effects: Direct effects are the first round effects of visitor spending, that is, how much the restaurateurs, hoteliers, and others who received the initial dollars spend on goods and services with other industries in the local economy and pay employees, self-employed individuals, and shareholders who live in the jurisdiction. It is important to note that there is a difference between direct effects and visitors’ initial spending. Multiplier models appropriately recognize that spending includes cost of goods sold so they measure direct effects by subtracting the cost of goods sold from visitor spending. Only about 80% of tourism spending in the local area is typically captured by the local economy as direct sales. The other 20% goes to cover the cost of goods sold at retail that are not made locally. This notion of “capture rate” is discussed later in this chapter.