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A Real Fix for the 74 Percent

January 09, 2014 By Conrad deFiebre, Transportation Fellow

In good economic times and bad, in days of tax reform or no new taxes no matter what, one fiscal consensus has held firm in Minnesota across the policy and political spectrum: robust capital investment in many public assets that support our prosperity and quality of life.

This has been affirmed through decades of supermajority approval of billions in state bonding and most recently by Gov. Mark Dayton’s call for $975 million in new borrowing – at still historically low interest rates – by the 2014 Legislature. After last year’s general obligation bonding bill was wrung dry of practically everything but much-needed restoration of the State Capitol, a near-$1 billion capital investment program is a worthwhile goal this year.

The Capitol, a century-old architectural treasure that reminds us of a time when Minnesotans were unabashedly proud of their self-government, is but a tiny part of a great array of state buildings that ensure public safety, high-quality education, clean water and much more.

Interestingly, though, all this “vertical infrastructure” is, in turn, just a small fraction of the state’s entire asset portfolio.
In dollar value, the lion’s share of all state capital assets – 74 percent, according to the Minnesota Department of Transportation – is tied up in the 12,000-mile state highway system.

And strangely, it’s this huge “horizontal infrastructure” component of our shared wealth that’s been sadly neglected for most of the past quarter-century. In the same period, we’ve seen half of state highway pavements exceed 50 years of age (equal to about 100 human years), a tragic interstate highway bridge collapse and the condition of Minnesota’s full interstate system sink to the bottom third in the nation.

This is no way to treat a huge underpinning of our economy. It’s a good question why, and the answer lies in a flawed fiscal model for our most important roads and bridges that plays right into the wheelhouse of right-wing opposition to “new” taxes. There’s an opportunity this year, however, to put an end once and for all to this very un-conservative and profligate running up of transportation infrastructure deficits.

First, some familiar background that bears repeating:

The overwhelming majority of levies across every level of government – income, sales and property taxes – automatically increase as pay, prices and real estate values go up. In addition to operating costs, these taxes cover debt service on bonding to build and maintain most of the 26 percent of state assets not in the trunk highway system.

But roads and bridges rely mainly on per-gallon fuel taxes that don’t adjust for inflation without legislative action. In decades past, as more and more Americans took to the roads in higher- and higher-horsepower gas-guzzlers, and routine bipartisan rate hikes at the gas pump funded expansion, the system remained financially sustainable (if not environmentally). Lately, however, less driving in more fuel-efficient vehicles, including a few that burn no gasoline at all, has put highway revenues in a real downward spiral.

How much? In a new long-term investment plan, MnDOT estimates $30 billion in state highway needs over the next two decades, but only $18 billion in projected resources -- most of which would be spent on maintenance while lane-miles in poor condition would still double or triple. The huge $12 billion gap, though, is actually down significantly from the $50 billion shortfall trumpeted just a few years ago.

The savings come mainly from a smart new approach to Twin Cities traffic congestion that relies on priced MnPASS lanes instead of ever-wider freeways. It refutes right-wingers’ claims that government always wants more, more, more, although it’s mostly the same folks who keep demanding more, more, more freeway lanes.

Of course, the last thing they want to do is pay for them, and raising the gas tax has become such a heavy lift that even progressives shy away from it. So what to do? Somehow, highway funding has to be made sensitive to rising costs of building and maintaining the system. Some states have tried indexing fuel taxes to general inflation. (Wisconsin did for a while, until conservatives repealed it a few years ago.)

A better idea is to link highway finance to the price of petroleum fuel, which is still the near-universal power source for motor vehicles and has the added advantage of closely tracking pavement costs. Minnesota Go, a public-private-University of Minnesota consortium, proposes adding a gross-receipts tax dedicated to highway purposes that would be paid at the pump. The suggested rate is 5 percent calculated once a year, which at current prices, minus 47 cents in Minnesota and federal excise taxes, would add about 14 cents a gallon at the pump.

Naturally, the exact level should be subject to debate and compromise. Last year a Senate committee approved a 5.5 percent gross-receipts rate tied to a 6-cents-per-gallon reduction in the state excise tax, but the measure went no further. Instead, legislators and Dayton applied a $300 million band-aid of borrowing to mollify pent-up demand for trunk highway expansion. That step used up the last of MnDOT’s debt service capacity under current funding.

“The credit card is maxed out,” said Margaret Donohoe of the Minnesota Transportation Alliance. “We do need actual new revenue this year. The problem isn’t going away; it’s just getting more expensive.”

A broader, more permanent fix would shore up not just the 8.5 percent of Minnesota roadways in the trunk highway system, but also tens of thousands more miles of state-aid county roads and city streets. It should be a top priority in 2014 for policymakers who care about Minnesota’s future.


For more to look for in 2014, see accompanying Hindsight blog: 
More for One-Four in Transportation

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  • Joan Tangen says:

    January 15, 2014 at 3:46 pm

    Investment in infrastructure is a most for economic growth.  I propose we establish a STATE BANK which we use to fund loans from ourselves and to which we repay the interest and loan balance to ourselves.  North Dakota has had such a bank for years.

  • David Schmidt says:

    January 18, 2014 at 11:09 am

    It seems that the primary issue is not “where do we get more money for transportation” rather, how much of our state and local budget should be spent on roads. First, a couple of common sense realizations: 1) the more something is taxed, generally the less people will buy it/do it. 2) Any publically funded transportation [roads which handle people and goods but more particularly light rail/subways which only transport people] will always require larger and larger maintenance and operations costs. If the gas tax goes up, very likely it will contribute to people buying less fuel [it’s possible it could have no impact as well]. As gas increases or remains high, a gas tax will certainly not encourage people to buy more gas or diesel. As the push by the environmentalists intensifies for electric cars, then the gas tax will also have diminishing returns. 

    To my point about priorities: Minnesota once was renowned for our roads. However, over the past 30-40 years, the funding priorities of the legislatures and the governors shifted from roads to Public Social Services and Education. The state spends myriad dollars on a variety of such programs.  From “The Minnesota Miracle” to MinnCare, Minnesota is not known for being stingy on public social services and education. The implicit tone from the author is that the state budget is incapable of more money for roads as the monies spent elsewhere are necessary and virtuous. I dispute that predication and suggest it is spending priorities vs. insufficient money.

    • Conrad deFiebre says:

      January 19, 2014 at 5:41 pm

      Implicit in Mr. Schmidt’s argument is that money should be transferred from social services and education to further subsidize driving, which is already heavily supported by non-user taxes despite being the preferred form of personal transportation for practically everyone who can afford it. The small additional levies needed to preserve this amenity for the relatively well-off (also, it should be noted, a key contributor to prosperity) will hardly affect that preference.

      It’s also worth noting that, as usual with these kinds of policy prescriptions, Mr. Schmidt lists no specific education or social service programs the state should be more stingy with to prop up drivers and business shippers.

      • David Schmidt says:

        January 20, 2014 at 7:13 pm

        In response to Mr. deFiebre’s thoughtful critique I posit 7 partial solutions. Each, by itself, would accomplish not much, but in totality would be meaningful. A) Zero based budgeting for every state entity. The actual savings might not be much, but it would be a start. B) Freeze Education, subsidized housing spending, any school lunch or breakfast subsidies,  and MinnCare spending at precisely current dollars and not increase for inflation. This would require substantial reform in MinnCare as current estimates suggest a serious “deficit” in the next however many years without changes in the program or serious increases in funding. However, by merely freezing the budgets, this would give them time to adjust prior to inflation really eating away at their budget.  Additionally, I would remove direct funding for “Early Childhood Education”. Kindergarten is soon enough, no need for K-4 or anything prior. If local districts wish for this, they can fund it. C) In return for freezing education, the Legislature should release the school districts from some of the more expensive legislative or state Education Dep’t imposed mandates. D) I would have proposed turning away the Medicare expansion as part of the Affordable Care Act. Although Congress promised a certain amount of money going to the states, Congress is not known for keeping their word [This releases Minnesota from the high risk that Congress will in some way renege on that promise]. Concurrently, I would not have set up MNSure and would have left that to the federal government. Part “D” is now water under the bridge, but I wish to remain consistent in cost reductions. E) I would suggest eliminating the homestead real estate tax credit. This is a state subsidy to local governments and hides or mitigates the true costs of local government.

        F) Focus on bussing and Bus Rapid Transit rather than light rail. Bussing is far more flexible and the capital costs and maintenance costs for light rail are very expensive and will never decrease [granted:  the maintenance costs of roads will also always increase]. G) Explore additional toll lanes assuming that additional non-toll lanes are also built. Adding a toll lane to an already underbuilt road [think 694 at two lanes in the north Metro], in some ways would be better than adding no lane at all, but adding a third lane plus a toll lane may be an excellent solution.

        As for Mr. deFiebre’s comment about “propping up drivers and business shippers”: A) any transportation seems to require government subsidies, whether roads or public transit. B) Roads can actually capture business taxes [already there are fuel taxes, vehicle sales taxes on trucks and trailors, vehicle registration taxes including a special Federal heavy truck tax, and any tolls with higher charges for heavy trucks]. C) I also shall argue that automobiles grant to people greater opportunity for career success and social mobility. Unless one is very dense metropolises such as New York or Chicago, not having access to an automobile in Minnesota will severely limit one’s job and social prospects.  D) Roads function as a three in one benefit relative to Mass Transit’s single virtue of personal transport: 1) Bicycles and walking; 2) personal auto traffic; 3) transport of goods and services.