Coastal Services Center

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Impact of Beach Nourishment on the Tax Base and Associated Revenues

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Introduction

Beach nourishment requires significant financial resources to fund both the initial costs of construction and, in most cases, periodic maintenance costs. Given the institutional structure in the United States and the relatively high cost of beach nourishment, most projects are financed by federal and state government. Government financing raises a variety of economic issues. The central theme of these issues is whether the governmentally funded project is worth the expense. In the private market, consumer spending answers this question. It is worth producing something if consumers are willing to spend enough money on it to provide producers with total revenue that is greater than or equal to their cost of production. Government, however, has the power to impose taxes on its citizens to finance public projects. There is no market test for a public project. Therefore, in the public sector, economic benefit is measured by performing a benefit-cost analysis. If a publicly financed project is undertaken, then government must find a way to finance it. Thus, from a fiscal point of view, the government entity providing financing for a beach nourishment project generally is interested in knowing how much beach nourishment will provide in increased tax receipts and/or increased user fees.

Economic Importance of Coastal Tourism and Recreation

It has been shown that coastal tourism and recreation provide a substantial positive economic benefit in the United States in terms of jobs, income, and governmental revenues. Over 90 percent of foreign tourism spending is concentrated in coastal states where beaches are the leading tourism destination (Houston 1996). For example, "Miami Beach reported more tourist visits (21 million) than were made to any National Park Service property" (Houston 1995). Houston estimates that the federal government receives annually about six times the tax revenues associated with foreign tourism spending at Miami Beach than it expends to restore beaches for the entire nation (Houston 1996).

Beaches create recreational and storm damage reduction benefits. These benefits create National Economic Development (NED) benefits. The increase in NED benefits is important in an economic analysis of project benefits, but this increase in NED benefits does not, in and of itself, finance the project. Financing must come from increased tax receipts, increased user fees, or increased borrowing. Of course, increased borrowing today means increased taxes tomorrow. To the extent that government can capture some of the increased benefits as a result of an increase in tax receipts or user fees, there will be less pressure for a general tax increase.

Tax revenues are generated as a result of the dollars that visitors spend while at the beach and the increases in local property values. In estimating the tax revenues that are generated by a beach nourishment project, only incremental tax receipts that would not otherwise occur without the nourishment project should be included. For example, increases in spending that result from beach tourists purchasing meals contributes to incremental spending and incremental taxes. Spending on meals by local residents visiting the beach is not incremental spending and does not contribute to incremental taxes, because this spending is assumed to occur in the region whether the local residents visit the beach or engage in some other local activity. The requirement that only spending by tourists increases local or regional expenditures, income, and tax revenues is essentially based on the common sense approach – the tourist would not be in the area spending money and generating taxes if ti were not for the beach. Spending that should be included in determining tax revenues associated with beach nourishment depends on the geographical definition of the region being studied.

For purposes of this paper, three regions are considered. The national region includes all of the United States; the state region includes all of the tourist destinations within a given state; and the local region is an area surrounding the beach destination. National and state areas are defined by political boundaries. The local area is sometimes also defined by a political boundary – the county or municipality – and sometimes defined by a market area. In this paper, tourist is defined as a resident from outside the region, regardless of the geographical definition of the region. Foreign residents are tourists for the national region, out-of-state residents are tourists at the state level, and residents from outside the local area are tourists in the local region. The incremental spending requirement has a second condition. For beach nourishment-related spending to increase regional spending, the nourished beach must attract additional tourists from outside the region. That is, if the beach attracts 100,000 visitors before nourishment, the beach must attract more than 100,000 visitors after the nourishment project. If the beach does not attract additional tourists, there is no increase in regional spending, income, sales tax, or income tax.

The larger the geographic area the government represents, the smaller the tourist base. That is, the tourist base is highest for the local government (everyone who visits, but lives outside the local region) and lowest for the national government (only foreign visitors). This is because tourists have more alternatives to visit beaches outside the local region than they do outside the national region. If a tourist visits Clearwater Beach in Florida rather than Daytona Beach, Daytona Beach loses tax revenue and Clearwater Beach gains revenue. This impacts local tax collections, but for the State of Florida and the federal government there are no net new taxes, only a distribution transfer. This is not to say that the State of Florida (or any other state) need not be concerned with beach nourishment. The State of Florida's beach resort areas are in competition with other states' and countries' resort areas and vacation destinations. Failure to maintain the beaches at Clearwater Beach and Daytona Beach may result in lost tax revenue to the state of Florida, both in terms of potential tourists and the state residents who may choose to visit a beach resort destination outside Florida. A similar argument can be made at the federal level. U.S. beach destinations are in competition with other possible vacation destinations outside the U.S. If a New York vacationer flies to a non U.S. Caribbean Island to vacation, rather than to a Florida or a North Carolina Beach, or if a European vacationer makes the same choice, then tax receipts are lost at the national level.

Federal Taxes

Taxes National Personal Income tax Corporate Income tax Indirect Taxes (gasoline, alcoholic drinks, etc) State Income tax, if any Sales tax Business permits/Property tax Local Sales tax Property tax Business Permits Possible parking fees Figure 1. Sources of Income Revenue for Federal, State and Local Government.

The federal government relies on the three major sources of taxes listed in Figure 1. Income taxes far exceed all sources of tax revenues. State and local governments rely more heavily on sales and property taxes for revenue. Among the states, competition for industry discourages the use of income tax as a major source of revenue for state governments. Increasingly, the federal government has provided aid to state and local governments for specific programs such as road construction, education, and libraries. Increases in income derived from beach related tourism expenditures raises federal government income tax receipts as well as indirect gasoline and alcoholic beverage taxes. However, the increases in taxes that result from domestic resident spending are assumed to occur at another location if the beach were not available. That is, the federal government assumes that domestic tourists would most likely choose another domestic vacation spot or another domestic beach. The tax revenues would accrue to the federal government; however, the source of these revenues would be from a different region.

To some extent this assumption may result in a bias in estimating beach benefits. Foreign tourist revenue increases domestic taxes. If an eroded beach (that is, poor quality) results in the foreign tourist substituting one destination domestic beach for another destination domestic beach, national taxes are still earned on the tourist's spending. However, if the foreign tourist choice is a beach outside the U.S., then obviously the U.S. does not earn additional taxes. No one knows to what extent foreign tourists substitute foreign beach locations for domestic beach locations and, as noted in Coastal Tourism and Recreation (NOAA 1998), there are many attractive foreign coastal destinations that may be close substitutes to our Nation's domestic beaches. European tourists can easily travel to a Mediterranean or Caribbean beach. Japanese vacationers can visit Australia's Gold Coast or Fiji's beaches (NOAA 1998).

State and Local Taxes

Figure 2. Tax schematic.

The major revenue sources for state governments are the income tax, the sales tax, and business permits and business taxes. Major sources of local tax revenues are derived from the sales tax and property taxes. As described for federal tax revenue impacts from beaches, only tourist dollars generated by tourists from outside the region (that is, the state or local region) increase regional tax collection. The basis for evaluating tax revenue impacts at the state and local level is similar to that at the national level. As shown in Figure 2, tourists from outside the region increase regional spending and therefore regional taxes. Local resident spending would most likely occur anyway, and thus would not increase regional income or taxes. However, if as a result of poor beach quality local vacationers choose a beach destination outside the local region, tax revenue is lost to the local region. Therefore, beach nourishment or related beach improvements that retain the local's expenditure within the local "region" avoid a decrease in local expenditures, and thus maintain taxes and the region's income.

The property tax is an important tax at the state and local level. Beach properties primarily benefit from storm damage reduction or prevention, and land loss prevention and from recreational benefits associated with the beach. These benefits are expected to be capitalized into the value of beach property, whether oceanfront or within the coastal county. If a beach nourishment project increases the storm protection and recreational benefits, or avoids the loss of existing storm protection and recreational benefits, then property values should be higher than they would be if the nourishment project is not undertaken. Higher property values result in higher property tax collections. For states like Florida with property tax limits, these increased collections will obviously be slower than in states without such limitations. Of course, states and localities can create special taxing districts or special tax methods so that properties located in close proximity to the beach pay a greater percentage of the cost of beach nourishment or beach maintenance. For one such proposal refer to "A Value Capture Property Tax for Financing Beach Nourishment Projects" (Parsons and Noailly 2001).

Results

The total effect of beach nourishment on tax receipts is difficult to measure. The tax effects are specific to each project. For residential beaches, with few tourist facilities, the impact is mainly through property taxes. For more commercial beaches the revenue impact will include incremental sales tax receipts, business taxes, and parking fees that are generated by tourists. The larger the geographic region, the more likely these taxes and fees would have been generated at another regional location and thus not considered incremental increases in taxes and fees.

One procedure that can be used to estimate the tax effects is to survey beach visitors to estimate the number of tourists on the beach and the average tourist expenditures. A tourist's spending on basic activities such as food, lodging, automotive-related expenses, entertainment, and souvenirs become income to the local supplier of these goods and services. Purchasing local goods and services increases sales tax receipts. Thus, as tourist spending increases demand for beach related services, local businesses may expand and hire additional local employees. These newly hired employees also spend a portion of their wages and salaries on local goods and services, further increasing local income. This increases demand for local goods and services and therefore income rises again. This process repeated over and over can be captured in a multiplier analysis that was developed for this purpose (refer to companion papers "The National Economic Development and Regional Economic Development Perspectives as They Relate to the Evaluation of Federally Cost-shared Projects" and "Models and Methods Used by Government, Academic, and Private Entities to Evaluate Project Benefits"). In this manner the initial and secondary changes in income and spending that are a result of incremental tourist spending can be estimated, and the resulting increase in sales and income tax collections can be estimated.

In a summary of economic studies on the impacts of beaches in the State of Florida, Dr. Stronge estimates that the statewide impact of Florida's beaches on the economy creates an estimated $16 billion in property values and $8.8 billion in annual spending. He also estimats that beaches contribute $320.6 million in annual local government revenues, $260.1 million in annual state sales tax revenues, and $428.6 million in annual personal and corporate federal income tax revenues. Further, he estimates that foreign residents own $3.5 billion of Florida coastal property, and that the beaches attract two million international tourists who spend about $1.1 billion annually in the state (Stronge 2001).

A 1998 study for the State of Delaware concludes that without continued beach nourishment at Delaware beaches, over a five year period more than 268,000 beach visitors would choose other vacation locations, decreasing tourist related expenditures by more than $30 million, and reducing state and local revenue by $2.3 million. Without continued nourishment, beach area properties were estimated to drop nearly $43 million in value (Jack Faucett Associates 1998).

Summary

Coastal tourism provides a substantial positive economic impact to the United States, to coastal states, and local communities. Spending on beach related activities generates jobs, income, and tax receipts for national, state, and local governments. However, in order to attribute the spending to a beach nourishment project, the spending must be incremental spending by tourists who would not have visited the beach in lieu of the project. It is difficult to determine whether any particular tourist activity is incremental. As a matter of practicality, most studies assume the non-residential tourist activity is incremental and residential activity is not. Thus, for any defined region, tourists represent a source of increased income to residents of the region.

Apart from the economic considerations, government entities must consider the budgetary or financial issues of beach nourishment. Economic benefits may outweigh economic costs, but if the benefits do not also bring increased revenue to the government, a way to finance the project will have to be found. From the local perspective, if the regional economic benefits outweigh the economic costs, the project should be undertaken. If a project exceeds this threshold, financing will come from some combination of increased tax revenue, government borrowing, user fees, and the federal cost share of the project. The composition of the local financing package will vary from beach to beach. Beach nourishment of a residential beach may generate increased property values. The revenue impact of nourishing a commercial beach may include additional sales tax receipts, higher business tax receipts, and increased user charges as well as increased property taxes. From the national perspective, a project should be undertaken if the NED benefits outweigh the economic costs. This is the basis for the federal government providing a portion of the financing for the nourishment project. As in the local case, if the increased NED benefits do not generate sufficient new tax and user fee revenues, then there will be pressure for a general tax increase or a reduction in the funding for other federal activities.

References

Jack Faucett Associates, L. K. Kent, and C. Jones. 1998. The Economic Effects of a Five Year Nourishment Program for the Ocean Beaches of Delaware. Prepared for Shoreline Management Branch, Division of Soil and Water Conservation, Department of Natural Resources and Environmental Conservation.

Houston, James R., 1995. The Economic Value of Beaches. The CerCular. Coastal Engineering Research Center. CERC-95-4.

Houston, James R. 1996. "International Tourism and U.S. Beaches." Shore and Beach: Journal of the American Shore and Beach Preservation Association. Volume 64, Number 2. Pages 3 to 4.

National Oceanic and Atmosphereic Administration (NOAA). 1998. "Coastal Tourism and Recreation." Web page http://www.yoto98.noaa.gov/yoto/meeting/tour_rec_316.html.

Parsons, G. R., and J. Noailly. 2001. "A Value Capture Property Tax for Financing Beach Nourishment Projects: An Application to Delaware's Beaches." Unpublished manuscript from the Web Page http://www.ocean.udel.edu/level1/facultystaff/faculty/gparsons/index.html.

Stronge, W. B. (n.d.). "The Economic Benefits of Florida's Beaches: Local, State and National Impacts." Web page http://www.coastalcoalition.org/ACCarticles/0901news.htm.