The Myth of Dedicated Revenue Streams

By John Carr, NMA Massachusetts Activist

“You have to have tax revenues to make it happen” — James Parker on infrastructure improvement

Once a friend asked for a donation to help a girl he knew. She was homeless, pregnant, and broke and needed a meal. We didn’t give. He had just told us she spent her last $10 to buy something frivolous. If we gave her money she would waste it. If we gave her food she wouldn’t eat it because she didn’t want to get fat. Her problem was as much mental as economic and money alone couldn’t solve it.

When I see politicians asking for money I see that girl from ten years ago. They say we need to raise the gas tax to close the road funding gap. If there is a gap — more on that another time — I doubt that we would be better off after a gas tax increase.

Statements about future spending of tax revenue are predictions, not facts.

Lies and instability

One problem is lies. You know the value of a politician’s promise.

Another is stability, in the sense used in science and engineering. A stable system resists small changes. An unstable system encourages large changes. In economic terms an unstable system has incentives to change the status quo.

Suppose proponents of a tax are honest about their motives. In time they will be replaced. Laws usually have loopholes. The next budget may divert a dollar, a million, a billion to some other cause. Pretty soon you’re talking real money.

A Massachusetts law has the optimistic title “Community Preservation Act.” The CPA is a property tax to pay for open space. It was supposed to supplement property tax revenue which was mostly spent on schools. Of course school committees wanted that extra revenue too. They argued that installing artificial turf on school athletic fields was kind of like preserving open space. Some of them won that argument and got their hands on the extra revenue. A special purpose tax turned into a general tax increase.

In 1998 states reached an agreement with the tobacco industry to pay for costs related to smoking and to help stop smoking. Over the years states would receive payments based on numbers of cigarettes sold. Most people knew the tobacco settlement was a lie. Dave Barry summarized the situation in 2002. Money a decade in the future is useless to a politician. Governments issued bonds backed by future settlement payments so they could spend the money now. Tobacco revenue is for whatever general revenue is for.

Chicago sold its parking meters to a private company for ten cents on the dollar, spent all the money, and now has to face 70 years of corporate abuse. When you feed a meter in 2079, you will not be paying for roads, cars, or transportation. You will be paying to balance the city’s 2009 budget.

The mortgage fraud settlement was supposed to compensate victims.The general funds of states seem to have been victims.

Several states have taxes on speeding tickets or license points. The fashionable name recently is “super speeder” fees “to pay for” traumacare. They don’t pay for anything. They go into the general fund. These fees are designed to evade constitutional limitations. Ticket revenue in parts of the South is earmarked for schoolchildren or must be shared with local governments. Surcharges and taxes on license points are general funds belonging to the state. An empty promise sold a tax increase.

Texas authorized red light cameras in communities that used the revenue for traffic safety programs. League City used the revenue for sniper rifles. Police aren’t using them to take out speeders or drunk drivers. They are toys.

Tax or fee?

One definition of a user fee, as distinct from a tax, is a charge paid by users of a service to cover the cost of providing it. User fees seem fair to voters and allow politicians to avoid the “tax” label.

Gas taxes are called user fees. You drive on a road, you burn gas, you pay gas tax, gax tax pays for the road. Sometimes they almost work that way. But not quite.

Originally the federal gas tax was purely for revenue. In 1956 Dwight Eisenhower had that revenue earmarked for roads. Ronald Reagan sent a penny to mass transit in 1982. George H. W. Bush sent 2.5 cents per gallon to the general fund in 1990. Bill Clinton sent 4.3 cents per gallon to the general fund in 1993 and Newt Gingrich gave it back to transportation in 1997. The true diversion of revenue is greater because the transportation fund pays for many billions of dollars of non-road projects. The entire transportation trust fund is an accounting tradition that could be revoked at any time.

The Massachusetts constitution used to require gas taxes to be spent on roads. An amendment allowed spending on mass transit instead. Court decisions allowed spending on non-motorized transportation. If we increase the gas tax it will be spent on a $2 billion railroad to carry 5,000 people per day while 50,000 people per day sit in traffic jams for want of a $500 million highway improvement project along the same corridor.

There is a link between gas tax revenue and road spending. The link is very flexible.

A politician asking for a gas tax increase for better roads is like a beggar asking you for $10 for food. Do you think he’ll go into the supermarket or the liquor store?

The telephone tax

I planned to open with the story of how the government taxed telephones to pay for a war we won a century ago. I found the truth more complicated. The tax was introduced in 1898 to pay for the Spanish-American war. If you believe Wikipedia┬áthe tax was repealed after America won the war. The tax was reinstated for WWI, repealed, and re-enacted forever in 1932. A decade ago people discovered a loophole. The law taxes charges that depend on distance. Modern plans use flat rate “minutes”. The government stopped collecting the tax. The perception that the tax was “to pay for the Spanish-American War” convinced Congress not to close the loophole.

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