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Let’s Redesign Minnesota’s Transportation Funding

Date Published: 11/26/2015

Author: John James

Note from G&J: Guest Blogger John James is a former commissioner of the Minnesota Department of Revenue and one of our state's more knowledgeable tax experts. G&J does not necessarily support all of the tax policy proposals advanced here, but we think it's an insightful analysis and a plausible argument.

Widespread recognition that Minnesota needs transportation infrastructure investment guarantees another legislative effort to provide it in 2016, after deadlock in 2015. With gas prices dropping under $2.00 per gallon, new proposals for higher fuel taxes are inevitable and another election-year deadlock can be predicted.

How about a really serious look this time on more reliance on general fund revenue and a complete redesign of transportation funding?

Minnesota’s transportation funding structure is inadequate both in using dedicated revenues and how they are spent through the Highway User Tax Distribution Fund, or HUTDF. Revenues are insufficient due to more fuel efficient vehicles, federal and state gas taxes that do not increase with inflation while construction costs do, less driving per capita, greater urbanization, a deadlocked Congress ignoring infrastructure degradation, and urban dwellers’ desire for more public transit, a desire being met more effectively in metro areas competing with the Twin Cities.

Public transit depends on the state general fund for roughly 20% of it’s financing, compared with no state general fund dollars for roads. This may make funding public transit harder because legislators don’t deal with road funding. Greater Minnesota legislators might hesitate to fund Twin Cities public transit when their transportation needs are mainly for roads, with automatic funding outside the general fund. Adding to the difficulty, the principal source of dedicated transit funding is 40% of inherently unstable motor vehicle sales tax revenues.

The required spending of dedicated revenues is anachronistic. HUTDF distributions for both county state aid highways and municipal state aid streets are determined pursuant to elaborate, old statutory formulas. Not only is Minnesota’s transportation funding system broken, the gas tax is regressive, falling more heavily on lower-income Minnesotans. Regressivity would be aggravated by increasing Minnesota’s fuel taxes, as contemplated by many advocates of increased transportation funding, and aggravated more if Congress finally increases the federal gas tax. Affordability also would worsen if gas prices rise again.

Gas tax regressivity is generally ignored because the gas tax allegedly is an economically accountable road user fee. The larger truth is that the gas tax has become irrational and arbitrary as a user fee. Fuel economy differences cause differences of a magnitude greater than 2:1 in the amount paid for using the roads if the gas tax is the user fee. Moreover, it is doubtful whether auto usage significantly affects Minnesota road deterioration, given the roles of heavy trucks and Minnesota’s climate. There is no rational basis, other than “we’ve always done it,” for taxing sales of gas more heavily than other sales.

The search for better transportation funding begins by recognizing that Minnesota’s transportation system is a public good benefitting all Minnesotans enormously, no matter how much or little they personally drive or use public transit. Transportation spending is the third largest category of Minnesota public spending, after K-12 education and health care. Thus it would be reasonable to fund transportation, a major public good, to a greater degree if not entirely, out of general revenues.

Dedicating revenues to transportation is a historical accident, not a natural law. When highway construction became a priority in the 1920s, the property tax was the main tax for both state and local governments, and there were neither income nor sales taxes. A gas tax dedicated to roads was therefore a reasonable idea. In 2015, Minnesota has income and sales taxes, as well as a gas tax. Had they existed in the 1920s, dedication might not have been enacted.

Minnesota’s sales tax is among the narrowest of any state – we tax less of what people buy than most other states, and thus the best approach to solving Minnesota’s transportation funding problem is rather obvious.

First, tax gas like any other commodity, either by converting the gas tax to the same percentage rate as the sales tax, or by repealing the gas tax and applying the sales tax to fuels. Second, vastly broaden the state consumer sales tax base and significantly cut the rate, from the current 6.875% to the 4-5% range, producing a lot of new state general fund revenue. Third, use the increased sales tax revenue and additional state revenue from reducing local business property taxes, in favor of state level business taxation that shifts tax burden to out-of-state businesses, to fund transportation. We could also reduce or eliminate local property tax funding of human services and K-12 education, and reduce the need for state aid to local governments, freeing up property tax base for local discretionary spending on transportation and other looming infrastructure needs.

This kind of transportation and general revenue system redesign would reduce the chronic automatic shortfall of revenue for transportation funding because, at both the state and local levels, transportation would be part of the mix in determining how much general fund revenue should be raised and how it should be spent. Making funding for roads dependent on the general fund, as transit funding already is to some extent, would facilitate reaching the necessary legislative compromise on how much of each to provide. It might also help resolve what could be a Twin Cities Metro/Greater Minnesota conflict on transportation funding.

Redesign could enable local governments to play a larger role in funding roads and transit, potentially including state trunk highway expansion projects. Let local governments vote with their constituents’ property tax dollars, and MNDOT could more easily prioritize projects. Redesign could permit repeal of the Metro Area local sales tax for transit, and enable transit system expansion to depend more on funding from the state general fund and local property taxes and facilitate use of tax increment financing to fund such expansions. Homeowners and renters can be protected against too high property taxes by the existing property tax refund program.

This redesign could be achieved with or without repeal of the gas tax and the constitutional provisions dedicating revenues to the HUTDF and transit. Whether to seek repeal would be a political decision on the best way to move Minnesota forward. The important essential truth is that the way forward has been blocked for far too long and it's time at last to consider a completely different and more sensible route.


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