Thinking about the transportation funding fight in Minnesota

MN roads

Source: Flikr Creative Commons

When I saw this tweet:

My first thought was this:


It’s been frustrating to watch the dance among Governor Dayton, Senate Democrats, and House Republicans on this issue. Instead of dealing squarely with how much to spend on transportation, the participants keep getting bogged down in funding mechanisms.  This is putting the cart before the horse; here’s why.

First, if the state is going to spend more on transportation over a given period of time, then there are only two ways to get the necessary resources: increase taxes or cut spending.  The only questions that remain are about the timing of the tax and spending changes.

The reason for this is that over the long run, the present value of government spending has to equal the present value of government revenue.  If this isn’t true, then a government will find it increasingly difficult to borrow or, in the most extreme cases, collect taxes.  Economists call this the government’s intertemporal budget constraint (GIBC).

Second, here are the basics of the funding proposals as we know them now:

  • Governor Dayton: increase the gas tax, use funds from the budget surplus, issue bonds
  • Senate: use funds from the budget surplus, issue bonds
  • House: use funds from the budget surplus, issue bonds, divert sales taxes collected on motor vehicle-related activities (auto parts sales, e.g.)

If we translate this into the language of the GIBC, we have:

  • Governor Dayton: raise the present value of government spending; raise the present value of government revenue by an immediate increase in the revenue stream (via increased gas taxes) and a promise to commit tax future tax revenues to transportation (i.e. issue bonds and pay them back.)
  • Senate: same as Governor Dayton without the gas tax.
  • House: hold constant the present value of government spending by reducing non-transportation spending by the amount transportation spending is increased plus the interest payments on any bonds issued; keep present value of revenue the same.

Put even more bluntly,

  • Governor Dayton and Senate: keep non-transportation spending on its current path and commit to raise taxes to pay for transportation, either now (via gas tax) or future (via bonding).
  • House: cut other spending to make room for increased transportation spending plus interest on bonds, keep revenue on its current path.

Notice that bonding simply moves tax decisions around in time. The amount of spending government can do is limited by the present value of taxes the government is willing and able to collect.

But this isn’t the way the debate is framed. The focus is on gas taxes (never! says the House) and bonding (too much! says the House, too little! say the governor and the Senate.)  This is exactly backwards in terms of formulating public policy.

This is what the two sides should do the following, in this order:

1. Figure out how much they want to spend on transportation;

2. Determine how much will come from cutting current and future spending commitments and reshuffling taxes that are already going to be collected (i.e. sales taxes on vehicle-related purchases);

3. Decide whether to raise taxes now (via gas taxes) or raise taxes in the future (i.e. issue bonds) to cover any increased spending.

I know that (2) is especially hard, but the sooner that Governor Dayton, Senator Bakk, and Speaker Daudt face this issue the better.