Tuesday, February 19, 2008

C'mon, a few more taxes won't hurt! 

The battle over the budget deficit -- with a revenue forecast still ten days away -- is heating up and before we even get to that the Minnesota Legislature is trying to salt away some money for transportation. I talked a little below about a corner of that debate, but let's get some additional information together.

The big news today is that the Legislative Auditor produced a report on transportation that said several things. I'm reading the report in bits, so don't consider this a thorough review, but what I have gleaned is this:
  1. "After 2003, inflation-adjusted revenues from Minnesota motor vehicle and fuel taxes declined, and the state made substantial use of debt financing to support the state trunk highway system." According to the last Tax Handbook, Minnesota collected $650 million on the gas tax in 2005 and $646 million in 2006. Which will of course lead people to think we aren't taxing enough, but consider the reasons offered: people are driving no more miles than before, in no small part because of more efficient vehicles and rising gas prices causing a reduction in the amount of gas used. Now I doubt we've raised the price of gas to the point where it's elastic in demand -- which would mean the gas tax revenues would fall for an increase in gas tax rates -- but it's almost certainly true that it's more elastic than previously estimated, so that a proposed 42.5% increase in the gas tax rate will not increase the amount of gas tax revenue raised by anything close to 42.5%. Yet it appears from reading the research summaries on the transportation bills that the DFL intends to spend more than $300 million per year on transportation, immediately freeing up that amount from the bridges to make pork.
  2. "Since 2002, the ride quality of state trunk highways has generally declined. The structural condition of bridges has generally improved." Call me paranoid if you must, but I think that second sentence isn't going to appear in news reports. MnDOT uses some qualitative measure of ride quality and for principal highways aims for 70% of them in good or very good condition. It looks like we're at 66-67% rather than 70%: Not very good, but we seem to be exerting a lot of effort for 3% improvement. Expected remaining years of useful life of the roads has indeed declined, but this was not enough of an emergency for the Legislature to pass anything more than a lights-on transportation bill. If the highways are in such dire condition, why is the Legislature this year threatening to not fund transportation unless their one bill is passed?
  3. We've spent more on highway expansion than on highway preservation. OK, that one looks real, though in a state where population is moving so dramatically away from the west to the east, do we really want to spend money preserving roads in places the people have left? 21.5 per 100 in-migration to Sherburne County, with large gains also in Isanti and Morrison counties. Name a western county, and you will see population decline. I find the LA's analysis, though correct, a little too macro-oriented. But because the Legislative Auditor isn't thinking that way, the office is arguing for much greater spending on highways.
So with that in mind, look at where we are. The DFL leadership came out with a press release today decrying the lack of money and that we need the tax increase. Not that it will do a thing for the deficit if it comes forward -- indeed, my argument is that the DFL is hurrying this bill along because they fear the revenue forecast will suck all the air out of this plan, forcing them either to pass more tax increases for that or cut spending, in which case nobody will be able to support both a tax increase for a budget deficit AND THEN a tax increase for transportation. But if they can pass the transportation tax increase first, they can pretend that didn't happen while fixing the budget.

Meanwhile, Governor Pawlenty continues to say he's going to veto the transportation bill.
Brian McClung released a statement in response to the DFL news conference. In his statement, McClung said:

"We appreciate the legislative auditor's report. It contains many helpful suggestions that we expect MnDOT to implement. Regarding the DFL press conference this afternoon - it appears DFL legislators are determined to pass a massive and overreaching $8 billion tax increase that the Governor has said he would veto. Just recently, DFLers increased the overall amount of their gas tax hike to 8.5 cents, in addition to license tab tax and sales tax increases. They are essentially disregarding the Governor's concerns and appear to believe they have the votes to override a veto. We'll soon find out the answer to that."
The governor's red veto pen is going to be challenged early, and while I am not sure this is more than a wild goose chase, the DFL is undoubtedly trying to buy some votes somewhere. (At least AAA's girlfriend got a good meal.) It's easy to have it both ways as Drew Emmer suggests -- you could have six GOPers vote for the bill but then vote to uphold the veto (they'd've voted for it before they voted against it.)

The Governor is taking an ax to the state payroll, implementing a hiring freeze. Now, there are some folks who are trying to make an argument that savings by budget cuts are just as harmful as tax increases. The logic is pure Keynesianism: if you cut spending by a dollar there's a dollar less of aggregate demand, but if you increases taxes by a dollar some taxes are paid out of savings, so aggregate demand only falls by the part that is funded by reduced consumption. It's part of those bad principles of macro courses where the instructor teaches the students government spending and tax multipliers. But, the story is always told using lump-sum taxes. For it to be right, the taxes must be taken from the public in some way that doesn't change the return on labor, capital, land or entrepreneurship, or alter the relative prices of goods purchased. (A head tax would be one example.) If the tax change DOES change the return on any productive resource, then the tax increase will decrease the supply of output and has an effect that could be more harmful than a spending cut. Increasing income taxes would be one example of a tax that changes the return on productive resources. It's an empirical question, as I often say, and the devil is in the details. Don't be fooled by simplistic explanations.

Still working on some other items so this post tonight might have to substitute for more over the next couple of days. We'll see. 80 days down for the Legislature (including the one in Special Session), 40 to go.

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