Pickett: A benefit, cost analysis of Conway street improvements

Conway’s voters are aware that the City Council approved an ordinance setting a special election on 14 November for a 3/8 cent increase in the sales tax. Proceeds from the sales tax are earmarked for street improvements. Street improvements are more accurately described as street resurfacing, restoration and rehabilitation projects. The costs include all the expenditures for engineering, design, materials, labor and related items associated with street improvements.

 

The economic principle applicable to the analysis of the sales tax increase is a benefit/cost (B/C) analysis. This is a method used to determine the value of a project in relative terms. Project justification is measured as the economic worth to the community. To evaluate a project’s benefit to the community, a B/C analysis will compare the benefit with the overall cost, to deliver and sustain the project. If overall benefits are demonstrated to exceed the expected costs, a project is considered economically viable.

As there is no real market for road expenditures (with a few exceptions such as toll roads), consumers are not able to register their preferences as they would in a competitive market. In a real market, consumer’s preferences are revealed by their purchase decisions, i.e., purchases of corn flakes vs. rice krispies or high brass vs. low brass shotgun shells. In the absence of a real market for city streets, B / C analysis provides a framework to determine whether road construction expenditures are optimal, i.e., in the public interest. A B / C analysis ends with the present value of the monetary value of the benefits being divided by the present value of the monetary costs. Any value above one indicates the proposed expenditure is in the public interest. When comparing two or more proposals, the one with the highest (above one) B/C is preferred to the others.

BENEFITS. The benefits of street improvements include travel time savings, vehicle operating cost savings, increased safety benefits and reduced congestion costs. The travel time savings will be a small positive value, because the forced reduction in speeds on bumpy streets will be eliminated. Vehicle operating cost savings will be the reduced wear and tear caused by the existing cracked and uneven street surfaces. Wheel alignment, loose mirrors, and new rattles will be avoided by improved street surfaces. Some safety benefits will emerge from fewer accidents caused by drivers attempting to avoid major bumps and other surface irregularities. Reduced congestion costs are clearly associated with the installations of the roundabouts.

Assigning a monetary value to each of the benefits associated with the proposed street improvement is not in order at this time. Since values cannot be assigned to the benefits for the street improvements, each voter must independently estimate the monetary value accruing to her from the street improvements. Smooth sailing along wide and straight roads through less congested roundabouts has a value. Measuring these values in dollars is impossible, because market transactions (sales and purchases) cannot be observed.

COSTS. The cost is the 3/8 cent increase in the sales tax imposed only for the next five years. The arithmetic of the sales tax shows for each $100 in taxable sales, the tax amounts to 37.5 cents. Some analysis shows that non-residents purchase significant amounts from city’s merchants. Hence, non-residents will pay for some of the improvements in the city’s streets. While making purchases within the City, non-residents will benefit from the street improvements, and their taxable purchases will pay for a portion of the costs.

BASE CASE ALTERNATIVE: If the propose sales tax increase does not pass, then the alternative is to fund street improvements from the existing budget. Recently, a group formed to examine the city’s existing budget to determine if expenditure categories could be juggled so that increases could be funded for high priority categories. Eighty three percent of the city’s budget funds employee related expenditures. Absent wage reductions or reductions in force, little flexibility exists within the budget. The final recommendation of the study group was that no new funds could materialize without reducing funding for existing categories. No argument or assertion that the proposed street improvement program can be funded from the existing budget is valid.

In the meantime, asphalt prices and other construction materials prices will increase. Pay a fixed amount over five years now or pay millions more stretched out over many years in the future. If delayed, voters can expect bumpy rides, increases in vehicle operating costs and fewer roundabouts (and lengthier stop lights).

THE CHALLENGE FOR VOTERS: Given the difficulty of assigning a monetary value to street improvements, each voter needs to determine a monetary value of the improvements based on their expectation of how the improvements will affect the quality of their lives.

VOTING: And so it is her determination whether the benefits of the sales tax exceed the costs when she selects ‘yes’ or ‘no’ on the 14 November ballot.

Early Voting opportunities are available Tuesday, November 7 - Friday, November 10 and Monday, November 13 from 8 a.m. - 4:30 p.m. at the Faulkner County Courthouse only.

Election Day voting is on Tuesday, November 14 from 7:30 am - 7:30 pm at the McGee Sports Center and Conway (Don Owens) Sports Center only.

 


 

John Pickett is an emeritus professor of economics at UALR. He is a Conway resident representing JP district #11 on the Quorum Court. He can be contacted at pickett@conwaycorp.net.

 


 

 

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