by Jim Erkel, Land Use and Transportation Program Director
The transportation bill passed by the Minnesota House and Senate and vetoed by Governor Dayton recommended using proceeds from the State of Minnesota’s general fund to support the state trunk highways and local roads. There are three main arguments against letting roads draw from the general fund – history, competing priorities, and the unreliable character of the general fund itself.
1. History Until the end of the Nineteenth Century, roads in Minnesota were considered a form of internal improvement. There was so much suspicion of such schemes that Minnesota’s Constitution specifically precluded the use of state funds for their construction and maintenance. When the need for better roads became too obvious to ignore, the Legislature worked through several specific new funding mechanisms -- investment proceeds, statewide property taxes, and finally the gas tax -- so that roads would not become a substantial draw on the general fund.
Road interests used the fiscal lemons of specific funding mechanisms to make political lemonade. They argued the dedicated funds would make it easier to plan and execute the state’s road systems. More importantly, they began asserting that ‘roads pay for themselves.’ This talking point was a stretch then and certainly isn’t true at the moment. As a bit of context, the state’s gas tax represents less than 20% of the total amount raised by all levels of government for the construction and maintenance of all of Minnesota’s roads and the largest source of source of funding for Minnesota’s roads is local property taxes.
Republicans are now arguing that roads are a priority of state government and should be able to access the general fund. This argument is simply a variation on the Republican theme of ‘no new taxes.’ In addition, they argue, as Rep. Jon Petersburg (R-District 24A) said last week, that “(w)e can’t continue to sustain it (road infrastructure) on the backs of just those who drive cars anymore.” In so doing, Republicans intentionally or not repudiate the history of road funding in Minnesota and the main talking point they have used to prefer roads to transit when funding transportation.
2. Competing Priorities It may well be that transportation in of its all forms should be a considered a priority of state government but polls consistently show that it rarely makes it out of the second tier of political issues that might have a reasonable call on the general fund. The second-tier character of transportation is reflected in how other states support roads with proceeds from their general funds. The support may be considered broad but it is not particularly substantial.
As the Minnesota Chamber of Commerce has noted, 34 states support roads with some proceeds from their general funds. However, general funds represent only 5.5% of all state funds used for roads. Even this amount is less than it seems. Of the 34 states that use general funds for roads, 2 -- California and Texas -- represent 45.7% of the $9.6 billion in general fund proceeds used in 2014 by all 34 states. If California and Texas are not included, proceeds from general funds represent only 3.9% of all state funds used for roads.
The effect of a small number of states that heavily rely on their general funds can be seen in the difference between the median and the mean in the amount of general fund proceeds used by the states. With California and Texas, the median of all 34 is $89.5 million/year/state but the mean is $248.6 million/year/state. If California and Texas are not included, the median for the remaining 32 states drops to $75.3 million/year/state and the mean is $163.8 million/year/state.
When it passed the House on March 31st, HF861 represented a projected hit to the general fund of $342.2 million/year in FY2020. In other words, Minnesota wouldn't be simply easing its way into the use of the general fund in support of roads, it would be diving into the deep end and spending more than 3 times the median and 2 times the mean of the 32 states other than California and Texas. At that amount, Minnesota would go from not being on the list at all to the top 10 of states supporting roads with general fund proceeds other than California and Texas.
In the transportation bill vetoed by Governor Dayton, the amount of general fund proceeds that would be directed to roads was reduced to $281.7 million/year in FY2020. For the most part, the general fund proceeds for roads needed to be reduced so that Republicans could use more of the projected surplus in the state’s budget to pay for their proposed tax cuts. This substantiates that roads are a second-tier issue even for Republicans -- they are a priority of state government for Republicans but they always take a back seat to tax cuts. It is too bad, then, that Republicans can’t seem to connect the dots and understand that raising the state’s gas tax would result in local property tax relief.
3. Unreliable Character
The general fund is one of the most unreliable mechanisms used to fund roads. Changing economic conditions and the ebb and flow of state budgets mean that a projected surplus in the general fund can quickly transform into a very real shortfall. Minnesota has some road-related experience with this problem. Almost as soon as the statutory dedication was established, the state experienced a difficult run of budget shortfalls. Predictably, the general fund proceeds intended for roads and transit were taken and used to balance the budget. After repeated fails, the statutory dedication was repealed.
The unreliable character of the general fund is also reflected in the experience of the 34 states that used general fund proceeds to support roads in 2014. In 2005, 28 states used some amount of general fund proceeds. Seven of the 28 didn't use any general funds in 2014. Of the remaining 21, 9 spent less and 12 spent more in 2014. In other words, 16 of the 28 states that used general funds in 2005 -- almost 60% --either stopped or reduced the amount they used from general funds.
There were 13 states that used general fund proceeds in 2014 that hadn't used any in 2005. Of the 13, one is Texas which went from spending no general funds to $2.54 billion/year. If Texas is not included, the remaining 12 new states had a median of $75.7 million/year/state and a mean of $95.3 million/year/state. Again, the conference committee report on HF861 would have directed $281.7 million/year to roads from the general fund. As a result, Minnesota would have grabbed almost 4 times the median and almost 3 times the mean of general fund proceeds used by the 12 new states. In fact, Minnesota would have hit the general fund harder than any of the new states other than Texas.
4. Conclusion The Minnesota Chamber argues that the trend is for states to support roads by making more use of their general funds. As far as it goes, this is true enough. After all, 28 states supported roads with general fund proceeds in 2005 and this number increased to 34 in 2014. However, the Chamber disregards the amount of churn behind this trend and the inadequate amounts ultimately raised. More importantly, the Chamber disregards the more substantial trend playing out in how states fund transportation -- the growing number of states that are raising their gas taxes. As 13 states began using general fund proceeds for roads between 2005 and 2014, 17 states raised their gas taxes. Nine of the 17 also supported roads with general fund proceeds in both 2005 and 2014. In fact, 7 of the 9 both raised their gas taxes and increased the amount of support for roads from their general funds.
The trend of raising gas taxes is set out in the third attachment which presents information on the 16 states that passed substantial packages to fund roads in 2015. Nine of the 16 raised or significantly modified their gas tax. Seven of the 9 were states in which Republicans controlled both the executive and legislative branches. In addition, 4 of the 7 deeply red states also enjoyed a budget surplus when they raised their gas tax. The trend took a hiatus in 2016 when only one state raised its gas tax because of worries by legislators about how such an increase would affect their bids for re-election. However, it has taken off again. Already in 2017, 6 states have acted to raise their gas taxes -- California, Indiana, Montana, South Carolina, Tennessee, and Utah.
Four of the 6 states are deeply red and the differences between the positions taken by Minnesota’s Republicans and their Republican counterparts in these states are substantial. In the most striking recent example, the gas tax was increased by 12 cents/gallon in South Carolina when the Republican House and Senate voted on May 10th to override a veto of the increase by the Republican Governor. In contrast to Minnesota, the gas tax increase in South Carolina was supported by Republican leadership and the South Carolina Chamber of Commerce. The increase passed even though South Carolina enjoyed a budget surplus this session. Most importantly, it passed after South Carolina had tried and failed to meet its road needs by using proceeds from its general fund. If Minnesota really wants to be part of a trend, it will raise its gas tax rather than draw down its general fund.