Maryland's transportation challenge - Good news and bad news

House of Delegates acts to fund Transportation projects – but tax credits are needed to ease the effect on low-income working families.

MBTPI from Center on Budget estimates

 THE GOOD NEWS: 

The Maryland House of Delegates, by a 78-56 vote, has approved a sensible financing plan for Maryland’s transportation network.

The plan will provide funding to maintain roads, to make our bridges and highways safe, and to expand mass transit, bicycle and pedestrian transportation options for Marylanders.

The funding – principally from a sales tax on gasoline, will phase in over three years (until now, the state gas tax has not increased in 20 years). Then, it will automatically adjust with inflation, so that our transportation system won’t fall behind again.

The bill also includes modest increases in transit fares – everyone has “skin in the game.”

THE BAD NEWS:

It makes sense to use gas tax and transit fare increases to support transportation needs. The problem is these sources place a disproportionate burden on low-income working families.

There is a solution within the legislature’s reach. They can also pass House Bill 845 or SB 703 to expand the state Earned Income Tax Credit. The credit particularly helps working people with kids who earn less than $50,000. By increasing it, we can offset their added cost of gas and transit costs that come along with these much-needed transportation improvements.

The Big Bad Wolf of Transportation

In our previous blog posts on the budget situation, we used the story of Little Red Riding Hood to illustrate the budget situation. Because Maryland has managed its finances responsibly through the Great Recession and its aftermath, and because the nation and the state are experiencing an economic recovery (albeit a slow, fitful, and uneven recovery), this year’s budget situation is much less challenging than the previous five or six budgets.

It’s like Little Red Riding Hood delivering her basket of goodies to Grandmother’s house. It ought to be an easy, straightforward task. However, there are Big Bad Wolves in the woods, and if Little Red happens to encounter one of them, the trip will suddenly become dangerous.

On January 16, Governor O’Malley delivered his budget and it was indeed less difficult and complicated than previous budgets. There is a comfortable ending balance, an increase in the State Reserve Fund, no large, highly visible cuts, and no significant tax increases.



Image: wpclipart.com

However, we cautioned about three “Big Bad Wolves” lurking in the woods. The first wolf was the federal fiscal cliff.

Today, we meet the second Big Bad Wolf: Transportation Finance.



Maryland has a system for funding transportation that relies on dedicated revenue. The revenue sources include transportation-related revenues like gas taxes and vehicle titling and registration fees, as well as a share of the corporation income tax. The gas tax is the largest of these sources. It has not increased since it was set at 23-1/2 cents per gallon in 1992. William Donald Schaefer was the governor.

Since the tax is a flat number of cents per gallon, the amount or revenue does not adjust for inflation. The price of gas in 1992 was $1.09 per gallon.

Soon, the revenue will be insufficient to cover any new highway or transit projects at all. It will only cover operating costs and routine maintenance.

Increasing the gas tax would be the most straightforward way to finance the state’s transportation needs. However, legislative leaders are wary of supporting a gas tax increase. It is perceived as being wildly unpopular with voters.

So … here is where the Big Bad Wolf of Transportation comes in. One way to increase transportation funds without raising gas taxes would be to use general fund revenue sources to finance transportation. And this could endanger adequate funding for education, healthcare, public safety functions, and the other important services that rely on those sources. Governor O’Malley keeps talking about a sales tax increase to solve the transportation problem. Virginia Governor Robert MacDonald has proposed a transportation finance package in that state that involves both increasing the sales tax and diverting a share of existing sales tax revenues for transportation needs.

• To avoid being attacked by this Big Bad Wolf, Maryland should fund its transportation needs with a gradual, phased-in gas tax increase.
• To reduce the economic effect as well as the "regressive" effect on low-income Maryland workers, the gas tax increase should be accompanied by a small increase in Maryland’s Earned Income Tax Credit.
• Finally, the revenue should be used to a balanced transportation program, including significant transit, pedestrian and bicycle improvements.

Immediate budget problem evaporating – serious challenges remain

Maryland’s budget deficit for fiscal 2014 is nearly gone. The legislature’s fiscal staff recently briefed the Spending Affordability Committee and presented new estimates. These incorporated revised estimates of state debt service requirements and casino revenues.

Source: Dep't of Legislative Services

The result is a projected shortfall of only $27 million. In the context of a total budget of $35 billion, that is essentially balanced.

Does that mean the Governor and legislature don’t have any budget work? Hardly. There are three big, big challenges.     

1.  The fiscal cliff. As we have shown, an impasse on the FEDERAL budget would have severe effects on Maryland’s economy and budget. The White House and Congress must achieve a responsible compromise that avoids precipitous cuts and middle-class tax increases, but that significantly reduces the federal deficit over time. Legislative staff recommended that the upcoming Maryland budget should leave a positive fund balance of $200 million as a buffer.
2. The structural deficit. Even though Maryland has virtually balanced its budget for the upcoming year, the state’s finances are not yet sustainable for the long haul. The projected budget for the upcoming year – fiscal 2014 - could be balanced without much effort because there’s a ¾-billion-dollar surplus to start the year. If we finance the budget by spending down that surplus, then revenues will continue to fall short of expenses after the balance is gone, and the state will be looking at budget shortfalls again in a year or two. So the Governor should propose ongoing revenue increases or spending reductions to bring the budget into long-term balance. One idea for raising revenues is an increase in the tax on cigarettes proposed by the Maryland Citizens’ Health Initiative. This would help balance the structural budget and reduce future health expenses by discouraging smoking.
3. The Transportation Trust Fund. Like most states, Maryland has a special, dedicated fund to pay for roads and other transportation projects: the transportation trust Fund. The gas tax, the transportation fund’s major revenue source has not increased since 1992. And the gas tax does not adjust to account for inflation or for fuel process. The fund is now running out, and without new revenues there will not be enough money for any new construction of roads or mass transit. Maybe not enough to cover operation and maintenance of what we have now. The 2013 legislature will need to consider increasing the gas tax for the first time in 20 years.

Apply the sales tax to gas

[This post has been updated and revised for accuracy]

On Monday, Governor O’Malley unveiled his plan to improve Maryland’s roads, bridges, and transit systems by making the first changes in the state’s gas tax in two decades. .  The Maryland gas tax has been 23.5 cents per gallon since 1992, but its purchasing power has declined dramatically over the last twenty years, to the point where it now approaches that of the 1920s.  With this decline in value, it’s clear why Maryland’s transportation system is in serious financial trouble today.

The governor’s plan addresses this problem by phasing out the sales tax exemption for fuel over three years, while continuing the 23.5 cent per gallon tax.  

Maryland State Fuel Tax
	Current Tax Rate	Proposed Tax Rate	Proposed Tax  per gallon *	Difference per gallon
First year	23.5 cents	23.5 cents plus 2%	29.7 cents	6.2 cents
Second year	23.5 cents	23.5 cents plus 4%	35.8 cents	12.3 cents
Third year	23.5 cents	23.5 cents plus 6%	42 cents	18.5 cents
* Assumes average price of regular gasoline is stable at $3.50 per gallon [which includes 18.4 cents in federal gas tax and 23.5 cents in state gas tax].  AAA makes available data on current state average gas prices.

Good transportation is one of the foundations of a healthy economy, and we need to raise the gas tax to make job-creating investments in better transit, roads, and bridges.  At the same time, applying the sales tax to gas will cost working Marylanders more, and we need to take that into account.  Pairing this change in the gas tax with strategic investments in public transportation, as well as asking wealthier Marylanders to pay their fair share of costs for vital services, are good places to start.