Monday, July 9, 2012

Taxes are Not Benefits, and an EIA is Not a BCA

California is intent on moving forward with building a high speed train. There are lots of supporters of the project, and lots of attempts to make the project economically justified. For instance, here is a new economic impact report from the Bay Area Council Economic Institute that has high speed rail supporters excited. Here is what America 2050, an enthusiastically pro-high speed rail group, reported on the Bay Area report:

The Council's study identified a potential economic benefit of up to $2.5 billion for the region over time from construction-related jobs and investment, improved real estate values near stations and the right-of-way, and employee time savings. The additional benefits of the fewer polluting diesel locomotives and shorter travel times are in addition to this economic boon.
The headline of the America 2050 piece claims that the two reports cited in their story show the benefits of the project outweigh the costs. Neither report did any such thing. The BACEI report is an economic impact analysis (EIA), which is substantially different than a benefit cost analysis. See here for details. An EIA only looks at how a project will affect a given location's economy. There are no mentions of costs, and because many of the economic effects are transfers rather than new activities EIA should be used with caution.

For instance, according to Table 14 of the BACEI the report (page 27), the $2.5 billion in benefits is the high estimate. The low estimate of benefits is just under $1.5 billion.The BACEI counts state, local and property taxes as benefits, which in this EIA they are because it is new money to the state. But to evaluate the project's benefits against costs you recognize that taxes are not benefits (and certainly taxes should not be called an economic boon). They are transfers. The state gets revenue from taxes, but the people who pay the taxes don't have that money anymore. The costs and benefits balance each other out.

If this report was a BCA, then many of the benefits claimed get wiped out. The report highlights increased property values as a benefit and travel time savings as a benefit. You don't get to count both of these. The reason the property values increased, according to the study, is because of travel time savings. So either travel time savings are capitalized into property values, in which case you do not include travel time savings in your cost benefit analysis, or they are not, and then you estimate travel time savings as a benefit and leave property values out of it.

In any event, the BACEI economic impact report is fine for what it is, but it isn't a benefit-cost analysis. The EIA makes no claims as to whether or not the project makes sense economically, and this should be made clear when this, and similar, reports are highlighted.

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