How Can States Balance Public Infrastructure Costs Against Lower Interstate Taxes?
By Deb Lavender, State Representative, 98th District, Missouri, and Michael Lucci, Senior Policy Advisor, Platte Institute
Well-Maintained Roads Are Critical to Daily Life and Economic Development
By Deb Lavender – State Representative, 98th District, Missouri
As the expression goes, none of us like to pay taxes. Yet most of us know the power of combining resources and the benefits society collectively receives when we pay taxes to local, state, and federal governments.
Missouri has 33,825 miles of highways and over 24,000 bridges. They may take you to Route 79, which leads to Mark Twain’s hometown and parallels the Mississippi River. Others can direct you to Interstate 70, traveling from St. Louis to Kansas City, or to pass through my metropolitan area district, you could use state highway Route 141.
Until 2021, Missouri’s fuel tax was 17 cents per gallon. Our current rate is 22 cents per gallon. A percentage of this tax income is distributed to cities based on population and to counties based on road mileage and land value. The remainder of the tax is directed to the Missouri Department of Transportation (MoDOT). State drivers pay about $32 per month in state and federal transportation taxes and fees.
The Challenge of Prioritizing Road Improvements
Roads are critical to our daily life and economic development. Yet our state highway system has been held together with patches for too long. Even a major thoroughfare in my district, which was on the high-priority list, took six years for work to start due to the limited state budget. Recently, in part because of Missouri’s increase in our fuel tax and President Biden’s infrastructure bill, state funding for road projects has increased. In 2022, MoDOT identified six high-priority, underfunded annual transportation requirements. Over a 10-year span, the total cost estimate of these projects is $10 billion. These funds would support MoDOT operations, finance major interstate reconstruction, improve multimodal transportation options, and invest in projects that increase economic growth and enhance safety. Additionally, the funds would help improve road and bridge conditions, an area in critical need of attention. According to the nonpartisan public policy research organization Reason Foundation, its 2023 Annual Highway Report found that Missouri ranks 39th in the nation for structurally deficient bridges.
Location matters when road improvement projects are considered. Our rural areas don’t make the list of priority projects because of the formula for fuel tax income distribution. Roads in these areas are often no more than dirt or are paved roads in such disrepair that they might as well be dirt. These roads are vital to drivers who support one of our state’s largest industries: farms. Missouri is home to 95,000 farms that comprise the state’s $93 billion agriculture economy. Last year, Governor Parson began to make these roads passable, including $100 million into his budget for rural route repair projects.
Last month, road improvements were again on the legislative action list. Missouri legislators approved a $50 billion budget. This includes a $2.8 billion expansion of Interstate 70 from two lanes each way to three to reduce traffic and limit congestion. Aiding the decision-making process for this project was a four billion-dollar surplus.
Unmaintained Roads Cause More Than Pothole Frustration
Hidden costs of driving on poorly maintained roads are significant: vehicle depreciation, repairs, and increased tire wear. Congestion adds to these problems. Idling in traffic translates to wasted fuel purchases and reduces productivity. According to the 2019 Texas Transportation Institute’s Urban Mobility Scorecard, the cost of congestion translates to a monthly average of $46 for Missouri drivers.
Motor vehicle crashes cost Missourians $20.7 billion each year. This equates to an average of $400 per month for Missouri drivers. The figure includes medical costs, lost workplace and household productivity, property damage, congestion costs, and legal costs. It is possible that Missouri fuel taxes could be doubled, if not tripled, to ensure safe transportation, and even with such increases Missourians would still have more money in their pocket due to the hidden costs of driving on poorly maintained roads.
Working Together, Legislators and Voters Have Created Tax Solutions
MoDOT has been underfunded for so long that they have become creative in creating community solutions. Such was the case for a lane expansion project on Route 36 in northern Missouri. The goal was to “improve safety by transforming the roadway into a divided highway and adding a lane to make passing safer.” MoDOT did not have sufficient funds to make it happen. In 2005, four counties along this stretch of road asked for and received voter approval for a half-cent sales tax dedicated to the project. MoDOT completed the highway expansion in mid-2010. According to the U.S. Department of Transportation’s Center for Innovative Finance Support, “The project has reduced the corridor’s crash rate despite a 50 percent increase in traffic volume over ten years. Increased economic activity along the corridor has also resulted in the opening of a number of new businesses.”
Taxes provide services upon which we all rely. Additional investments to improve the conditions of roads and bridges, ease congestion, and decrease accidents through better engineering will be a win for the people of Missouri.
Spending Restraint Can Increase Interstate Tax Competitiveness
By Michael Lucci – Senior Policy Advisor, Platte Institute
Representative Lavender lays out the classic argument for funding public roads with user fees. The people who pay gas taxes and tolls are the people who benefit from using the roads. State roads are funded similarly across the country, in large part by user payments that make up the majority of road funding across states.
Policymakers on both sides of the aisle tend to agree on the wisdom of applying user fees for roads, while public opinion is decidedly against higher gas taxes and tolls. Arguably, policymakers should go even further and insist that all road funding comes from user fees rather than using state general funds. Yet, public opinion stands in the way of such a move. Ironically, both Democrat and Republican leaders have tapped into a populist dislike of gas taxes to call for gas tax holidays. Gas tax holidays make roads more dependent on general funds rather than user fees.
A 2021 Missouri law raised its gas tax from 17 cents per gallon to 19.5 cents (which increases annually and will reach 29.5 cents in 2025) to provide more road funding and reduce dependency on state general funds. Missouri last adjusted its gas tax in 1996 and the value of the gas tax did not keep up with the cost of infrastructure maintenance. Furthermore, fuel efficiency in new vehicles has increased by approximately 30% since 1996, meaning that new cars exert more wear and tear upon the roads per gallon of gas consumed.
Gas Taxes Are Sound Policy if Funds Are Directed Only to Roads and Bridges
The gas tax increase puts Missouri’s user fee system more in line with other states, where gas taxes range from a low of 15 cents per gallon in Alaska to a high of 78 cents in California. And as Representative Lavender points out, taxes to repair poorly-maintained roads defray user costs by reducing car repairs, vehicle crashes, and congestion—which costs you time at work and with family. Missouri’s law also increased fees on electric vehicles to approximate the cost of their road use.
Raising the gas tax is smart policy so long as funds are used for critical roads and bridges. Gas taxes should not fund unrelated programs. General state taxes, however, do not operate by the benefit principle of taxation, raise revenues from a growing economy, and should be optimized for economic efficiency. States should apply low tax rates to a broad tax base in order to fund state programs. Enhancing tax competitiveness is particularly important in the post-pandemic era of heightened interstate competition, and like the majority of other states, Missouri has responded with a series of income tax cuts.
States Should Restrain Spending to Maintain Tax Competitiveness
But we cannot look at gas taxes and tolls in a vacuum. Three recent structural changes have amplified interstate tax competition. First, the 2017 Tax Cuts and Jobs Act increased the “felt cost” of state and local taxation by putting a $10,000 cap on the federal deduction for state and local taxes paid. Previously, a high-earner in California could deduct $60,000 in state taxes on his federal tax return. But that deduction has been slashed, incentivizing a move to a lower-tax state.
Next, the pandemic dramatically increased the prevalence of remote and hybrid work, untying many white-collar workers from a physical location. This has allowed workers to relocate based upon the relative costs and benefits of each location. Many are choosing lower-cost, lower-tax jurisdictions. Finally, states have seen a gusher of tax revenue in the post-pandemic recovery, giving them surpluses with which they can fund tax cuts. And cut they have. Missouri is in line with the majority of states in cutting its individual and corporate income tax rates. States can lock in these tax cuts with spending rules that cap how much state spending can increase from year to year.
While some argue that cutting income taxes is a “race to the bottom,” taxes in the United States are quite progressive. The federal tax code is the most progressive in the developed world, and a new study from the Tax Foundation shows that the U.S.’ federal-state-local tax and transfer system is also highly progressive. Most Americans have a negative net tax liability when both taxes and benefits are factored in, with only the top two quintiles being net taxpayers.
The right thing for states to do is to compete on tax policy and impose fiscal rules to restrain their spending growth. The pandemic woke up Americans to state policy differences, and they are responding by relocating. States should prioritize competitive tax codes and low spending growth. In light of feckless federal fiscal policymaking, states need to provide an example of spending restraint and tax competitiveness.
Spending Limits and Low Taxes Don’t Improve Quality of Life
By Deb Lavender – State Representative, 98th District, Missouri
I appreciate Mr. Lucci’s response. Missouri has a unique road fund structure that separates road-related taxes from our general revenue fund. However, for years we have underfunded our roads in Missouri which has led to a significant decline in road conditions, both interstate and rural routes. With the influx of federal dollars during the pandemic and an increase in our revenue collection over the past three years, this year’s legislative session—which ended in May 2023—saw Missouri invest this additional revenue in both our interstate and rural roads. Because Missouri is uniquely positioned in the middle of our county, focusing on our highway systems will make the transportation of goods (and our citizens) safer and at the same time bolster our economy.
Mr. Lucci’s recommendation that there should be “…spending rules that cap how much state spending can increase…” and that we should “…impose fiscal rules to restrain their spending growth” would limit how and when states can fund highway renovations and prevent states from being able to capture opportunities for economic development when funding becomes available. A business would never cap its growth potential, especially when the funding exists. Why should states?
The pandemic has shaken up society as we knew it. People may be looking for low-tax states now, however, they are also looking for good education for their children, which requires good pay for teachers; dependable services in our communities; a health care system that supports families; and social policies that support life choices. Missouri is a low-tax state which has resulted in multiple challenges, one being poor road conditions. However, safe roads are only one service that citizens have a right to expect and deserve from their state government.
Spending Restraint Will Keep States Fiscally Flexible
By Michael Lucci – Senior Policy Advisor, Platte Institute
Missouri allowed the value of its gas tax to lapse for decades, and as Rep. Lavender pointed out, restoring the value of the gas tax allows Missouri to upgrade the conditions of its roads, bridges, and other physical infrastructure.
On the other hand, states should not allow general revenues to grow much faster than inflation and general expenditures should grow even less rapidly. Such fiscal discipline will allow states to maintain a low tax burden, which is a good result in itself. Furthermore, states need to maximize their fiscal flexibility, which will be essential in the coming years.
The federal government faces daunting fiscal challenges that will inevitably impact the states. As a matter of historical record, the federal government has never been able to raise revenues in excess of 20% of GDP, regardless of whether top income tax rates were 70% or 28%. In contrast, federal spending is currently 25% of GDP, a post-war record that is driving painful inflation.
The federal government has created and spent unbelievable amounts of money it couldn’t collect through taxes. Steep deficits are projected to grow, reaching over $2 trillion within a decade. High interest rates make federal finances unsustainable. The feds will eventually trim spending, and fiscally disciplined states will best weather the next federal fiscal storm. In 2023, the White House estimated $1 Trillion in federal outlays for state and local governments, spending that competes with national defense and growing entitlement programs.
Federal finances are obviously unsustainable. Though the future remains uncertain, states that maintain low taxes and spending will be best positioned for whatever comes next.
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Deb Lavender
State Representative Deb Lavender is serving her 4th Term in the Missouri General Assembly. Serving as a member of the Budget Committee she works for better healthcare and mental healthcare coverage for Missouri's children, those with disabilities, and for the developmentally disabled communities. Lavender attended Marquette University and soon after moved to St. Louis and opened an outpatient private practice before running for office.
Michael Lucci
Michael Lucci is a Senior Policy Advisor at the Platte Institute. He was previously the Vice President of State Projects at Tax Foundation and the Vice President of Policy at Illinois Policy Institute. Michael has served as a presidential appointee on the Federal Services Impasse Panel and as the Deputy Chief of Staff for Policy to the Governor of Illinois.
