Economist: Tax cuts will help low income; businesses must spend to overcome ‘reputational harm’

UA Walton College economist Mervin Jebaraj said new tax cuts and those proposed for later this year could help in a variety of ways, especially for lower income Arkansans, and he suggested the state’s businesses will have to work harder to overcome a national negative reputation in the wake of this year’s high-profile controversies in the legislature.

Jebaraj said state revenues held up pretty well during the pandemic in large part because the federal government pumped billions into the economy. It not only propped up government and businesses, but helped keep consumer spending stay robust.

“All of that money has had some effect on boosting state income tax collections, state sales tax collections because people have been sending it home and shopping online. Luckily the year before the pandemic happened, the state had imposed a sales tax on online sales, so the state’s been collecting quite a bit of taxes from online sales as well. That piece is important,” he said.

Jebaraj said a couple of tax cuts passed this session will be helpful to workers who struggle with transportation as well as teachers. The used car tax cut was expanded to include autos under $10,000, which should benefit low wage earners who are challenged to travel to and from work. Teachers received a larger deduction for extra materials they had to purchase as a result of the pandemic. Jebaraj suggested the state’s projected $600 million budget surplus, which will lead to a special session later this year to consider more tax reform, should be used to address a looming housing crisis.

“What we have in our state is a large portion of the population are renters and a good number of them have had to go months without paying, and there’s been an eviction moratorium for a long time. Eventually, that eviction moratorium is going to be lifted, and the concern would be that a lot of these people are going to be evicted and would be homeless,” he said. “I think it’s important to set up some type of fund to be sure we don’t have some sort of eviction crisis and homelessness crisis after the pandemic is over.”

Jebaraj also spoke on the high-profile legislation passed during the recent session that garnered negative national headlines for Arkansas. Specifically, laws that restrict transgender medical care for teens and transgender participation in sports have resulted in pushback from the NCAA.

Jebaraj noted that North Carolina, a state much larger than Arkansas, lost an estimated $3.6 billion in economic activity from cancelled events and businesses exiting when it passed a transgender bathroom bill a couple of years ago. He expects Arkansas will see lost revenue being the first state to pass the transgender medical restriction law.

“We would have gotten a [baseball] super-regional in June. The last time we measured the impact of the super-regional was in 2018. At that time, over two weekends, we had $3.6 million spent in Northwest Arkansas from visitors from outside the region. I’m not talking about spending by all of the Razorback fans that are in Northwest Arkansas, this is just money coming into that region from fans of the teams that were not Arkansas,” Jebaraj said. “Considering that we’re coming out of a pandemic that has impacted the leisure and hospitality industry in particular, and summer is usually a very slow month for the leisure and hospitality industry especially in Northwest Arkansas, this would have been a shot in the arm.”

Jebaraj said these laws and others that are viewed negatively by business leaders could challenge workforce recruitment and tourism in the coming years.

“I think we’re at this point still in the very early stages of seeing the economic impacts to tourism and in addition to all of that obviously we are trying to attract new people to move to Arkansas with the latest Census numbers,” he said, referencing Arkansas’ 3.3% growth over the last decade. Nationally, the U.S. population grew by 7.5%, according to preliminary data.

“It is going to make it a lot harder for the major corporations that are trying to recruit workers to move to Arkansas and for Arkansas to recruit remote workers, given that there will be a lot more remote workers to move to Arkansas. I certainly think there’s going to be a lot more reputational harm… Arkansas businesses will need to do a lot more work, spend a lot more money on recruiting people to beat those negative perceptions,” he said.

You can watch Jebaraj’s full interview in the video below.