Making Cents of $18 Million

By Jeremy Horpedahl

Is $18 million a small amount? Is one-fourth of a cent a large amount? On Super Tuesday, voters in Pulaski County will not only be selecting presidential candidates. They are also deciding whether the sales tax will be increased by one-quarter of a percentage point to provide $18 million for funding of public transit in the county. As an economist who studies taxation and public finance, I hope to provide voters with a framework for thinking about this important issue.

Taxes do two things: they increase the cost of living for those paying the tax and they provide funding for government services. It is useful to think about these two sides of taxation separately. While the tax is described as providing a dedicated funding source for Rock Region Metro, voters can think of this as a pure tax increase since no other taxes are going down.

While one-quarter of a cent sounds small, economists look at the bigger picture. Big, abstract numbers such as $18 million are hard to comprehend. It helps to think about them on an individual level. According to the Census Bureau, Pulaski County has roughly 150,000 households. This means the tax increase is about $120 per household per year. Is that large or small? Economics cannot provide the answer, but this is one way for an individual voter to think about: $120 per household, not a mere “quarter of a penny.”

Another important aspect of taxation is how it affects households of different income levels. Sales taxes are “regressive” taxes, meaning that low-income households pay a larger portion of their income than higher-income households. In other words, $120 is a lot of money for family scraping by on the minimum wage, but not very much for a college professor. Regressive taxes are generally opposed by advocates for the poor, although this issue is complicated by the fact that poor households are more likely to use public transit.

What government services will the tax increase fund? Rock Region Metro has many plans for the funding, but the main advertised benefit seems to be increasing ridership by 30 to 40 percent. Since the estimate comes from the transit agency, we can assume it’s an optimistic estimate, but let’s work with the 40 percent figure.

Current daily bus ridership is about 10,000, meaning that ridership could go up by as much as 4,000 riders. This give us another way to breakdown that big $18 million figure: $4,500 per additional rider. If the 40 percent estimate is too optimistic, the cost per new rider would be even greater (for example, if ridership increases 20 percent the figure is $9,000).

As a thought experiment, imagine we could identify those 4,000 individuals and offer them a choice between a check for $4,500 per year and a bus ride to work every day, what would they choose? If you suspect most of them would rather have the $4,500 check, then you are admitting this might not be the best use of taxpayer dollars. In other words, perhaps there is a better service that could be provided to them or a different group of citizens.

Here is how an economist would think about this issue: all Pulaski households will pay about $120 per year so that 4,000 individuals can receive a $4,500 benefit. Is this a good deal or not? That’s up to the voters. But the voters should also keep in mind that according to the Tax Foundation, Arkansas already has the second-highest state and local sales tax in the nation (higher than New York and California) and the highest overall tax burden in the South. Tax increases should not be considered in a vacuum. Voters need to decide if they are already paying enough taxes, or if the higher regressive taxes are justified by the increased services they will provide.

Jeremy Horpedahl is an Assistant Professor of Economics at the University of Central Arkansas and an affiliated scholar with the Arkansas Center for Research in Economics. He lives in North Little Rock.