The dispute between Gov. Tim Pawlenty and many legislators over highway funding boils down to the old question of “jam today or jam tomorrow?”
On second thought, that is not quite accurate. Both the governor and legislators want jam today. The legislators want to pay for the jam today. The governor wants to put the jam on a credit card and let our kids pay the bill tomorrow.
The question of when governments should tax and when they should borrow is an old one. We face it right now at the federal level, where, despite a good economy, we are borrowing large sums to fund everyday government operations.
Here in Minnesota the question is whether to raise the gasoline tax to pay for road construction or borrow money to do the same. On Tuesday, Democratic U.S. Rep. James Oberstar of Minnesota weighed in, advising the Legislature to raise taxes or risk losing federal transportation money that requires a state match.
A few observations may be helpful.
First, borrowing at the national level is different from borrowing by state and local governments.
There are no constitutional limitations on the purposes of federal borrowing. Historically, we borrowed for wars and occasional singular expenses like the Louisiana Purchase. Between wars we paid down debts incurred for military purposes. Still, the national government clearly could borrow at any time for any purpose. It also can create money, something no state can do.
The historic consensus on prudent financing carried over to states. Most have some law or constitutional provision requiring balanced operating budgets. These limit borrowing to long-term physical projects like roads or state buildings.
Second, it is important to remember that government borrowing does not reduce taxes, it just moves them from one year to another. Some elected officials rely on public misunderstanding of the word “bonding” to mislead the public about this.
Bonding does not mean that money somehow floats down from heaven to pay for a project. It simply means borrowing money. This borrowed money has to be repaid, with interest, at some point in the future. Those principal and interest payments can only come from taxes.
One may ask, if prudence historically meant that states could borrow money for physical infrastructure but not operations, isn’t the governor’s stance correct? Roads are infrastructure, aren’t they?
They certainly are. The issue is the scope of new spending relative to the existing road base.
If a homeowner has to re-roof her house every 25 years, it may make sense to borrow for such a large expense and pay the loan off over several years.
However, if a state has 25 state college buildings with roofs that each last 25 years, it should simply re-roof one building a year. There is no economic advantage in borrowing for each year’s roofing while simultaneously making principal and interest payments on money borrowed in prior years.
Do the transportation projects we need constitute a single, large new initiative? Or are they simply a collection of the sort of year-in, year-out maintenance and improvements that any large organization faces?
Some individual projects certainly are large. Redoing the 35W-Crosstown junction south of Minneapolis will cost what an aircraft carrier did only a few years ago. However, most others are on the scale of ones that we historically have done every year for decades.
Remember that always there are temptations in government to transform bread-and-butter maintenance and improvements into capital projects. When budgets are tight, it is easy for a state college to delay re-roofing Old Main Hall. It can do that for several years and then tell the Legislature, “Lots of our roofs are bad. Issue bonds so we can fix them.” The same thing can happen with roads.
We have not raised the gasoline tax for 19 years. Economywide inflation since that time is 71 percent. Costs specific to road repair and construction probably have gone up even more. The population has grown as have total miles driven. Gas tax revenue per capita and per mile driven have declined. We have let a backlog develop. That doesn’t mean we need to borrow all the money needed to reduce the backlog.
Oberstar’s point on federal funding is important. Forgoing federal funds because we don’t want to tax ourselves is like forgoing an employer’s 401k contribution match. Some people do it, but it makes them poorer.
Gov. Pawlenty’s threat to veto any gas tax increase can be interpreted two ways. Is he really saying, “I won’t let us pay for better roads that we ourselves will drive on; our children and grandchildren should pay instead”? Or does he mean, “No one will pay more taxes while I am governor; they can pay more after I move on to a better job”? The voters eventually will decide.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.