The Road to Perdition

The governor wants to spend billions on roads without raising your taxes. Think there might be a catch?

It's not every day you see business interests lobbying hard for a tax increase. But in the marbled corridors of the State Capitol, it hasn't been unusual during the past two legislative sessions to see paid suits from the Itasca Project--a lobbying consortium representing 30 of the state's largest employers--and the Minnesota Chamber of Commerce buttonholing lawmakers and imploring them to start spending money to address the deplorable condition of Minnesota's roads.

Last May the legislators finally listened, as both the Republican-controlled House and the DFL-majority Senate passed a bill raising the gas tax by a dime, boosting tab fees, and calling for Minnesota voters to decide whether the state constitution should be amended to allow all the proceeds of motor vehicle sales taxes to be dedicated to transportation. The estimated revenue from these measures was between $7.5 and $7.8 billion over the next 10 years, still not nearly enough to remedy problems that figure to cost anywhere from $1 to $1.5 billion annually during the same period. (The discrepancy is a matter of whether you're looking at spreadsheets from the Minnesota Department of Transportation or ones from the Itasca Project).

But it was all a moot exercise anyway. Literally wielding a big red VETO stamp to appease the no-tax crowd that remains hell-bent on a something-for-nothing relationship with government, Gov. Tim Pawlenty deep-sixed the bipartisan transportation bill. "How dumb can they be?" he sneered of the lawmakers who dared approve a tax hike to fix the state's roads. (Ironically, it was less than 24 hours later that Pawlenty came back with a proposal to raise the price of cigarettes 75 cents, claiming with a straight face that it wasn't a tax but a "health impact fee." The courts have subsequently ruled that, due to the state's settlement with the tobacco companies, such a "fee" can't be levied. Because Pawlenty refuses to call it a tax, the state is spending time and money to appeal the ruling.)

But Pawlenty's veto didn't bury the transportation bill entirely. Under Minnesota law, a governor cannot stop a constitutional amendment from going on the ballot once it has been passed by the House and Senate. Thus, this November, voters will decide whether all the proceeds from the motor vehicle sales tax (MVST) should be dedicated to transportation. Given that the MnDoT describes its current financial situation as one of "cash flow problems" ("A more accurate way to say it is that they're broke, pure and simple," says Steve Murphy--DFL-Red Wing--the chair of the Senate Transportation Committee), there is overwhelming sentiment to approve the amendment.

"I support it. Everybody's going to support it," says Larry Pogemiller (DFL-Minneapolis), who chairs the Senate Taxes Committee. "We are part of a large coalition that thinks the constitutional amendment is a good thing," says John Gunyou, former finance commissioner under Gov. Arne Carlson and the current city manager of Minnetonka. "But this was just a small piece of the transportation bill. It is like saying you are for one part of a ten-part plan. What about the other nine parts? This can't be all that we do for transportation. And then the other question is, how do we fix the hole this creates in the general fund?"

That "hole" would consist of the hundreds of millions of dollars--46 percent of the MVST revenues, currently--that pay for education, health care, and other general fund expenditures. If voters approve a constitutional amendment dedicating all MVST to transportation, those dollars would steadily be phased out of the general fund, beginning at $60 million in fiscal year 2008 and climbing until all $309 million had been taken out by 2012.

This scenario plays perfectly into the hands of Tim Pawlenty and those Taxpayers League types who subscribe to a "starve the beast" theory of reducing the size of government. No one should be surprised that Pawlenty is suddenly cheerleading for a measure that survived his veto; it is a chance to bang the drum for $300 million per year in "additional" transportation monies without raising anybody's taxes. The political calculus is simple enough: Let it fall to the Democrats to point out that those revenues will necessarily be taken from schools (K-12 and higher education make up 50 percent of the general fund) or health care (20 percent). And when they do, claim that the "hole" will be filled by a growing economy freed from the yoke of tax increases.

Once again, Pawlenty's ace in the hole is a bit of accounting chicanery: Minnesota is the only state in the nation that uses inflation-adjusted revenue projections to estimate what it will take in, but refuses to count inflation when tallying up its spending needs. For example, the Minnesota Department of Finance has already estimated an inflation rate of 3.5 percent for 2006. We are in the first year of a $30 billion general fund budget for the 2006-'07 biennium, meaning that Minnesota's 2006 budget is roughly $15 billion. Well, 3.5 percent of $15 billion is about $525 million. That's how much we'll see on the plus side of the state's ledger early next year simply because of the way we cook the books. When the state is showing such phony surpluses, it becomes much easier to suppose the general fund can afford to siphon $300 million a year out of health care and education, dedicate it to roads, and not have to raise taxes.

In the broader scheme of the state budget, however, the MVST monies are just slow drops in the bucket for a transportation system desperately in need of both long-term fixes and quick patching. To get the ball rolling, Pawlenty is also proposing to borrow $2.5 billion for road projects over the next four years and pay off the bonds with future MVST revenues.

This is a similar scheme to the $800 million in highway and bridge money the governor borrowed three years ago, currently being paid off in 20-year bonds. That earlier plan also took tens of millions of federal dollars that were supposed to be earmarked for highway maintenance and used it for bond payments.

"The governor hammered through a plan that doesn't pay for itself," says state Sen. Steve Murphy (DFL-Red Wing), "and so now for the first time in the history of the state, the Department of Transportation is broke. What that means is if someone drives through a guard rail it is not going to be replaced very soon. If someone breaks an axle on a pothole, it is not going to be filled very soon.

"Now the governor wants to borrow $2.5 billion, and it will cost $3.84 billion to pay off those bonds. That's more smoke and mirrors, more money in interest charges instead of potholes. Those 20-year bonds won't be retired for 32 years. Our folks didn't do that to us, but that is the debt we will be leaving our children. They talk about not raising taxes, but that doesn't stop these Republicans from spending money faster than a boatload of drunken Marines."

"There is no mystery that [the Pawlenty administration] is turning to debt service to fund the projects on the table now," says Curt Johnson, who served as chief of staff to Gov. Arne Carlson and worked for the Itasca Project in developing its transportation strategy. "It's a matter of keeping the lights on. They are postponing projects and moving priorities because they have starved the revenue. Everybody I talk to says, Yeah, we need to pass this amendment, and we should. But we need to realize that, at most, it is a 15 percent down payment on the problem, and it opens up a hole in the general fund budget on the other side.

"If we are going to close the investment gap in our road system," Johnson continues, "we are going to have to ask people who benefit from the system to pay a little more to make it better. I just find the politics of the gas tax to be ridiculous. The governor says people can't stand a 10-cent increase. Good God, over the last year or so we have seen the price at the pump rise by more than that between breakfast and lunch. And we raise an eyebrow and grumble a little and go on.

"All you have to do is look around the country. Charlotte, Phoenix, Dallas, Salt Lake City all have big study groups heavily involved with big business coalitions, and all have come to the same conclusion: Use a small piece, maybe up to a penny, of the general sales tax to do some serious transit planning and construction. These are not wide-eyed liberal places. These are very conservative, coldly calculating places that want to do something meaningful to solve the problem."

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