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OPINION | JEREMY HORPEDAHL: Paying for roads

Sales tax not only way to find cash by JEREMY HORPEDAHL SPECIAL TO THE DEMOCRAT-GAZETTE | September 25, 2020 at 3:12 a.m.

Both of these things can be true: Our taxes are too high and roads are a vital public service. This November, Arkansas voters are being asked to choose between them.

The sales tax on the ballot would raise nearly $300 million annually, with about $200 million going to the state and the rest going to local governments. That works out to about $100 per Arkansan per year in new, permanent taxes.

Whenever we think about raising a tax, it's important to consider where Arkansas stands. For sales taxes, Arkansas already has the second-highest tax rate in the nation. Including local rates, our average is 9.53 percent, according to the Tax Foundation. That's just below our neighbors in Tennessee, but those neighbors don't have a state income tax.

We should also remember that sales taxes fall disproportionately on lower-income households, as they typically spend a much larger fraction of their income on taxable goods and services. By raising the sales tax, we are not necessarily raising taxes on those that use the roads the most. Instead, we are raising taxes on the poorest Arkansans.

Do we spend enough on roads? Arkansas has the 15th highest spending on roads per capita, or the 11th highest spending as a percentage of personal income in the state, according to the most recent data from the Census Bureau's Annual Survey of State and Local Government Finances.

Even if we look at 2012 data, before the temporary sales tax to fund roads was put in place, Arkansas had the 22nd highest spending on roads as a percentage of personal income, and was above the national average.

Perhaps more money is needed, but there is more than one way to fund a road. Raising a general sales tax, as voters are being asked to do, is one method, certainly. It is not the best one.

A fundamental principle of taxation in public finance economics is the benefit principle: Those who benefit from a tax should be the ones paying it. We all benefit from roads, but some individuals and businesses benefit from them more. There are a few other options for funding roads which come much closer to fitting the benefit principle than a general sales tax.

Option 1: Increase the gas tax. It would take a large increase to generate the same amount of revenue: I estimate about 13 cents per gallon if applied to both gasoline and diesel. Users of roads pay the gas tax roughly in proportion to their use, but not exactly since fuel efficiency varies. Increasing fuel efficiency is also one reason that gas taxes haven't kept up with the costs of building roads. However, Arkansans may be skeptical of this since the Legislature just increased gasoline and diesel taxes at the last session.

Option 2: Toll roads. While toll roads would be new in Arkansas, our neighbors in Texas and Oklahoma have numerous toll roads. A 2014 study by the Transportation Department found that putting a toll on I-40 from Little Rock to West Memphis could raise up to $200 million per year. A major hurdle is a federal ban on tolling existing roads, but both the Obama and Trump administration have discussed lifting those bans in certain cases. For tolls, the users of the roads clearly pay for them, in proportion to their use of the road.

Option 3: Reduce spending. One simple method worth considering is for government to spend less on other things. Finding $200 million in the budget seems like a daunting task, but it's actually right in front of our eyes: $200 million is roughly the amount the state general fund increases in a typical year. If there are worthwhile, crucial road projects in a given year, the Legislature could divert the increase to road funding.

This November, voters must decide whether they want to make the sales tax increase permanent or not. These other funding methods aren't on the ballot right now, but they are real options the Legislature could take up in the next session.

The current sales tax for roads doesn't expire for a few more years. There's plenty of time for our elected representatives to go back and find better ways to keep Arkansas moving.

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Jeremy Horpedahl is an assistant professor of economics at the University of Central Arkansas, and a research scholar at the Arkansas Center for Research in Economics. The views expressed here are his own and are not an official position of UCA.

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