Traditional Economic Impact: Issues

In any economic impact analysis, the contribution to the local economy should be limited to impacts that derive from export income income from outside the local area). Alternatively stated, the measured contributions should be based on economic activity that would not exist if the business or institution did not have a local presence.

In the case of a university, the basic activities are those supported by tuition from out-of-state students or by research funds from out-of-state sources. The share of university operations supported by state appropriations should not be included in the economic impact calculations. If the university did not exist, either state government would spend these tax dollars on other public programs or taxes would be lowered, with taxpayers largely spending their tax savings in the local economy.

A common mistake in the interpretation of findings from an economic impact study is to express them as being the result of a benefit-cost calculation, or as representing a rate of return on investment, analogous to the return on a financial investment. Suppose that a university is found to have a total impact (including multiplier effects) on state income of $3 billion, while state appropriations used to support the university are $500 million. It is commonly reported that the university provides economic benefits to the state economy that are six times the costs, yielding a return on the state’s investment of 500 percent. A proper interpretation of the economic impact finding is to simply say that the presence of the university serves to increase employment and economic activity in the state in an amount equal to $3 billion of total state income.

Whether the economic benefits of the services provided by the university exceed their costs depends on whether the additional incomes students are able to earn because of their education exceed the total costs of obtaining the education. This kind of calculation can be made, but it is not the one made in economic impact analysis.

While university impact studies generally overstate the magnitude of the traditional economic impact, other benefits that can be claimed by educational institutions, such as the spillover benefits from enhanced human capital, usually are not included.