It doesn’t matter if the venue is Slayton, St. Paul, Washington, D.C., or Brussels. If there is a pot of money, people from different regions will fight over it and economists will not be able to offer much advice.
Society frequently benefits when units of government cover broad and varied regions. While taxes may be uniform, spending seldom can be. Resulting disagreements over the distribution of public resources are best resolved with politics, not economics.
Minnesota’s metro-rural road funding dispute, discussed in a Monday article in the Pioneer Press, is a concrete example of a more general phenomenon.
In Minnesota, state motor fuel taxes and vehicle registration fees generate some $1.3 billion annually. This money is distributed according to a formula enshrined in an amendment to the Minnesota Constitution more than 40 years ago. Some 62 percent goes to state highways, 9 percent to cities with populations exceeding 5,000 for streets, and 29 percent to counties for “county state aid highways.”
Money from other sources also is used for road construction and repair. Cities, counties and townships use some funds from real estate taxes. The state can appropriate general revenues or issue bonds that must be repaid from general revenues. The federal government pays for most work on national highways and passes some transportation money to the state, cities and counties. The $1.3 billion divided by formula is a big slice, but is not the whole pie.
While complicated, this multi-tiered funding makes economic sense. There is great variation in how benefits of streets and roads spill over to the general populace. Neighborhood streets and township or county roads with low traffic largely serve households in the immediate area.
On the other hand, higher-traffic streets in one city are often traveled by commuters from another city. Higher-traffic county and state highways often carry vehicles on trips that begin and end outside the jurisdiction where the road is located. State and national highways may carry traffic from other states or countries. Just look at license plates on Interstate 94.
It is thus easy to identify the primary beneficiaries of Scudder Avenue behind my house or the Moulton Township road past my farm. It is much harder to estimate the exact benefits of Minnesota 61 or Interstate 35 to different groups in society.
Before World War I — when roads were overwhelmingly a local responsibility — we clearly underinvested in them. There was no incentive for any town or country to build roads that would benefit non-residents and non-taxpayers. Each municipality built to meet its local needs; no one built to serve the state or nation. Subsequent state and federal road funding made our economy much more productive. It helped make us richer.
It is cheaper to collect fuel taxes at the state and federal level than having each city or county do it. However, having officials at the city and county level maintain responsibility for most streets and roads produces better results than centralizing decisions at the state or federal level.
In other words, our current system makes economic sense and works pretty well. But there are recurring problems. When fuel taxes are collected at the state level, what is the fairest and most efficient way of splitting up the pot?
Using a formula, such as the one in question right now, takes much political maneuvering out of year-to-year transportation spending. Cities and counties can plan construction and maintenance knowing that a certain level of funding will be there regardless of how skillful their legislator is in bringing home the pork.
The formula approach has a downside, however. When it’s enshrined in a hard-to-amend constitution, a formula freezes funding into a pattern that made sense when the formula was adopted, but that isn’t rational when population, technology and the broader economy change tremendously.
Using an outdated formula results in inequities. Residents in some areas pay much smaller fractions of local transportation costs than others. It is also economically inefficient to spend dollars on things that produce less for society than alternatives not favored by the formula. As a state, we are poorer as a result.
Changing the formula might be easier if there were some analytical technique economists or engineers could use to estimate not only the benefits but also the beneficiaries of whole ranges of transportation spending and then identify the socially optimal set to implement.
Unfortunately, there is no such technique. We can do studies that estimate the costs or benefits of specific projects, but that is about all.
We may not like the political process necessary to design or modify spending formulas. With all the posturing, horse-trading and coercion that go on, it isn’t a pretty sight. But in practical terms, we have no better alternative than representative democracy in approximating what is best for society in spending transportation dollars.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.