Haley Road Plan: Higher Taxes, New Debt, Fuzzy Numbers

THE GOVERNOR’S PLAN IS A SHELL GAME THAT WOULD DO LITTLE TO IMPROVE S.C.’S ROADS

Gov. Nikki Haley’s plan to fix South Carolina’s decrepit roads and bridges and lower income taxes will ultimately do neither. The governor proposes to raise the gas tax 10 cents over three years, cut the income tax by 2 percent over ten years, and restructure the Department of Transportation in some unspecified way. In addition, Haley’s executive budget proposed decreasing the overall funds available for road maintenance and repair, and instead direct more than twice the amount to new construction and expansion projects.

The plan is based on contrived assumptions, impossible predictions, and misleading promises.

The governor proposes increasing the state gas tax by 10 cents over three years in exchange for a 2 percent decrease in income tax for all tax brackets. If it were implemented in one year, it would represent a 30 percent income tax cut. In reality, the cut would be phased over 10 years – that’s 2/10ths of a percent each year. In short, the gas tax increase will take effect in three years, but even if the tax cut implemented – and that’s up to the General Assembly each year, not the governor – the full effect wouldn’t be realized until the year 2025.

The result? Low income families will be pinched at the pump – particularly when gas prices go back up – with little relief at home. The reduction in income tax, by contrast, would be phased in over 10 years, and lawmakers would have to agree not to eliminate it each year for a decade.

First, revenue from the fuel tax is not the reliable source of revenue the governor seems to believe. It’s impossible to predict the fuel efficiency of the average car in ten years, the price of gasoline over the same time period, or whether the federal government increase the federal gas tax (a likely scenario). All of these factors could reduce consumer demand for gasoline and so send gas tax revenues plummeting.

The same is true of the governor’s projected revenue losses as a result of income tax reduction. Indeed, government revenue projections are notoriously inaccurate, all the more so when prognosticating ten years into the future. The plan reveals only two of the scores of assumptions that would have to go into such wild projections – a fact that itself should cause concern. (Specifically, the governor’s plan assumes an annual 1 percent growth rate in the number of filers in each income grouping; and a 3.75 percent rate of growth in taxable income for 2014, and a 4.3 rate of growth in 2015 and 2016.) But even if all assumptions were made explicit, the plain fact is that predicting revenue a decade into the future is guesswork. Remember: the same agency that produced these projections often have to revise yearly projections months after they were made.

Second, the income tax reduction plan depends on the highly suspect assumption that lawmakers will agree to it – or at least not repeal it – each year going forward. Haley’s plan is to offset her proposed gas tax increase with 0.2 percent reduction in the top marginal income tax rate each year for 10 years until the rate is reduced from 7 to 5 percent. But neither Haley nor the current legislature can force future legislatures to implement these proposed tax cuts. There’s a very real chance that taxpayers under Haley’s plan would receive the upfront increase in the gas tax but receive nothing or almost nothing of the income tax reduction. After all, Gov. Haley will have left office before even half of her proposed income tax cuts are supposed to come into effect; the assumption that future lawmakers will keep foregoing the lost revenue of further tax reductions is, to put it politely, not a safe one.

Third, tax swaps aren’t tax reform. The governor would like to paint her plan as a tax cut for all South Carolinians. It isn’t. The poorest citizens, who effectively pay no income tax due to state refunds and the federal earned income tax credit, would feel the burden of the gas tax increase but will have no offsets elsewhere. Genuine tax reform is not based on swaps, but broad-based cuts that allow all citizens to keep more of what they earned. Any tax plan that approaches cuts with a focus on their revenue impact is coming from the wrong place.

In any case, however, the tax cuts aren’t as significant as the governor claims. In her State of the State address, she rightly argued that South Carolina should reduce taxes in order to remain competitive with other states. But her proposal would hardly make South Carolina competitive. North Carolina, for example, recently cut multiple taxes; its marginal income tax rates were reduced to a flat 5.75 percent. Even if implemented perfectly, then, Haley’s plan would take 6 years just to make South Carolina’s income tax rate competitive with North Carolina’s as it exists today.

The governor’s plan would transfer funds from maintenance to expansion

In her executive budget, Gov. Haley proposes transferring an additional $105 million over last year’s appropriations to the State Transportation Infrastructure Bank (STIB), an organization that funds expansionary road projects by the issuance of public bonds – i.e. debt – typically to politically important counties. Without calling attention to it, furthermore, the governor proposed cutting the budget of an agency that actually performs road repairs and maintenance. In her executive budget Haley cuts overall Department of Transportation (DOT) appropriations by roughly half a million dollars.

(Granted, in the press release announcing the executive budget, the governor proposes sending $61.4 million from the current sales tax on cars and trucks to the DOT for road maintenance. But a closer look at her actual proposed spending plan – leaving aside the talking points – reveals that other monies would be taken away from DOT, with the result that the agency would receive about half a million dollars less than it received the year before. Whether the governor intended this or not is impossible to say.)

In other words, Gov. Haley’s roads plan would first divert funds from much-needed maintenance to new expansionary road projects, many of which are unnecessary.

It gets worse. The funds the governor wishes to transfer to the STIB come from state gas tax revenues, which are the only transportation funds the DOT has complete discretion over. Roads in South Carolina are funded through three revenue sources: other funds (state gas tax revenue), federal funds, and debt financing as provided by the STIB. Out of these three funding pools, state gas tax revenues are by far the smallest. They are also the only revenue source that is free to be devoted to routine maintenance. Federal funds cannot be spent on routine maintenance, and they cannot be transferred upfront to the STIB (since federal funds are dispersed as match dollars and the STIB finances its projects with bond debt).

That means Haley’s plan would take what little money DOT has for routine maintenance, and divert it to new expansionary projects in politically influential counties.

Haley’s DOT reform plan isn’t a plan.

Finally, in her State of the State, the governor mentioned a need for reforming the governance structure of the DOT. True enough, the DOT – an agency  run by an unaccountable commission elected by legislative delegations – desperately needs to be reformed. But Gov. Haley provided no specifics on what the reform should look like. Calling for government restructuring with no plan for actual reform is how South Carolina ended

DOT governance now

DOT governance now

up with a Department of Administration bill that returned no significant powers to the governor and simply renamed the Budget and Control Board.

Further, if the governor wants structural reform at DOT, why does she propose transferring an additional $105 million to the STIB – an organization run by a board even less accountable than the DOT commission?

In short, even the legally workable components of Gov. Haley’s reform would fail miserably to accomplish anything close to what she claims. This is chiefly because it’s based on the false assumption that South Carolina’s roads problem is a revenue problem. It isn’t, and no version of revenue reshuffling will solve it. The problem isn’t one of revenue but one of structure: South Carolina’s transportation authorities aren’t adequately using the resources they have.

How to Fix our Roads

Any discussion of increased revenue in the absence of transformative structural reform puts the cart before the horse. Here are the actual transportation reforms that need to be undertaken to ensure South Carolina government is making the most of its existing transportation dollars.

1) Require maintenance work be prioritized over new construction

The DOT has long given construction projects a great deal of weight when determining their budget requests. In recent years the Department has requested over four times as much for construction projects as it has for maintenance expenses. This imbalance is due to a combination of an unaccountable DOT governing board, and perverse incentives provided to state transportation authorities by federal road funding formulas. Federal road funding formulas prohibit federal funds from being used on routine maintenance, and contribute to the DOT neglecting non-federal aid eligible roads in favor of those that are eligible for a federal funding match.

In order to address these misplaced priorities state law should be amended to mandate the prioritization of road maintenance and repairs. The law should require that no more than a designated small percentage of all DOT funds can be spent on new construction until a large majority of the roads controlled by the DOT are rated in good or very good condition by another agency such as the Federal Highway Administration.

2) Make the DOT accountable to the governor 

The DOT is the chief agency charged with building and maintaining South Carolina’s state-owned roads. It’s also – technically – a cabinet agency, and as such should be fully under the control of the state’s chief executive. But while the DOT is administered by a secretary appointed by the governor, its policy is set by an unaccountable eight-member Commission.

Under current law, seven of eight members of the DOT Commission are elected by the state legislative delegations of each of South Carolina’s seven congressional districts. The one remaining commissioner is appointed by the governor. Prior to a candidate being eligible for election to the DOT Commission, he or she must first be screened by the Join Transportation Review Committee (JTRC), an entity that is made up entirely legislators or legislative appointees, the majority of which are controlled by the House Speaker and Senate President Pro Tem.

In short, it’s nearly impossible for citizens to hold anyone accountable for the policy decisions of the DOT, because all but one of its commissioners owes their position to a group of legislators. Even if a citizen were to take a complaint about DOT policy to their legislator, that legislator can plausibly deny responsibility – he was only one vote of many approving the commissioner.

The less accountable an agency is, the more likely it is to make decisions that suit the personal preferences of management (lawmakers) over the preferences of citizens and taxpayers. In DOT’s case, this means prioritization of expansionary projects in politically important districts that should be shelved, and a corresponding neglect of maintenance throughout the vast majority of counties.

The solution here is simple. The DOT Commission should be eliminated and DOT policy should be set by the DOT secretary, under the auspices of the governor. This would establish clear lines of accountability, and would end the political favoritism that has plagued South Carolina’s transportation infrastructure for generations.

3) Devolve some state-controlled roads to local control 

South Carolina state government is responsible for the 4th largest state highway system in the United States despite being the 40th largest state in terms of land area and the 24th largest in terms of population. Altogether the state DOT is responsible for 41,459 miles of road. These 41,459 miles make up 63 percent of all roads in South Carolina. In contrast, the average state DOT controls only 19 percent of roads in its state.

This is bad enough. What makes the situation dire, as mentioned already, is that the state transportation authorities prioritize expansions far above maintenance. Since it serves the entire state, the DOT will naturally want to focus its efforts on high traffic highways and urban roads that serve the greatest number of citizens. This natural tendency is compounded by a federal road funding structure that encourages the state DOT to spend disproportionately on roads that are eligible for a federal funding match, to the detriment of non-federal aid eligible roads.

State government can minimize this problem by handing over some of the miles of road currently controlled by the DOT to local governments. The state should transfer some of these road miles (particularly the non-federal aid eligible miles) to local governments along with an appropriate share of gas tax revenue. Local governments would have better knowledge than a centralized entity of local road conditions. Further, local governments’ proximity and accountability to the citizens who use the roads in their borders would provide them an incentive not to neglect rural or residential roads that currently receive little attention from DOT. Currently they can simply blame the state – with some justification. Road devolution would take away that excuse.

4) Abolish the Infrastructure Bank 

The State Transportation Infrastructure Bank (STIB) provides financing for expansionary transportation projects (roads, bridges, and transit projects) throughout the state. The STIB finances these projects by creating new debt in the form of bonds.

The STIB has historically financed projects in only a handful of the state’s 46 counties, and it has never contributed financing to maintenance or repair. Recently, legislation has increased the STIB’s recurring annual appropriation. All indications are that the STIB will use this money exclusively for new expansionary projects.

As with the DOT, STIB policy is set by an unaccountable board. The STIB Board is made up of seven members, the majority of whom are controlled by the House Speaker and the Senate President Pro Tempore.

The STIB should be eliminated. It isn’t an effective tool for solving South Carolina’s infrastructure problems because it doesn’t contribute in any way to road maintenance, South Carolina’s most critical infrastructure need. All money that is sent to the STIB could be better spent on road maintenance and repair. In fact, the STIB actually wastes even more transportation dollars than what it is directly appropriated since, once expansionary road projects it finances are completed, the state must devote more resources to maintaining these new roads. And of course the STIB constantly generates new debt, for which the taxpayer is ultimately responsible.

Abolishing the STIB will both free up more transportation dollars for maintenance and repair and reduce the burden of state debt borne by the taxpayer.

5) Full transparency in DOT spending and construction contracts

Taxpayers have a right to know just how the gas tax revenues they send to Columbia are being spent. This means the process for all state contracts for road construction, maintenance, or repair should be open to public inspection. The DOT should also make publicly available detailed descriptions of its expenditures, including all the road projects in which it is currently engaged.

Transparency will allow citizens a better view of just how the DOT is prioritizing maintenance needs versus new construction. And transparency in the contract process can help to prevent the awarding of contracts on any criteria other than cost and effectiveness.

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