DALLAS– States should raise taxes and issue more debt to finance transportation and water projects while borrowing costs are low and the economy continues to strengthen, the Center on Budget and Policy Priorities said in a report.
Revenue collections remain below historic averages in many states, leaving room for tax increases to fund investments in roads, public transit, schools, and other infrastructure, said report author Elizabeth McNichol, a senior fellow at the nonpartisan policy think tank.
Overall state revenues have exceeded their pre-recession levels, better enabling states on average to afford infrastructure investments, McNichol said.
“But in many states revenues still aren’t sufficient to adequately cover the costs of needed services such education, health care, and infrastructure investments,” she said. “Some states will need to consider tax increases to preserve the public capital that is crucial to long-term economic growth.”
Connecticut and Washington are in the early stages of multiyear transportation improvement programs while 10 states, including Idaho and Georgia, have increased their road construction budgets within the past 12 months by raising state gasoline taxes.
However, state infrastructure spending as a share of the economy continues to fall as the needs rise, McNichol said.
“Spending by state and local governments on all types of capital dropped from its high of 3% of the nation’s gross domestic product in the late 1960s to less than 2% in 2014,” she said. “Falling federal spending on infrastructure is exacerbating the problem.”
Conditions for borrowing by state and local governments have rarely been better thanks to the low cost of capital, McNichol said.
Debt service payments averaged 4% of current governmental spending in 2013, the lowest level since the Census Bureau began tracking the data in 1977, and exceeded 5% of total spending in only nine states, she said.
“If borrowing returned to pre-recession levels as a share of the economy, an additional $400 billion would be available, with which states and localities could address infrastructure needs,” McNichol said.
Although Congress may consider a tax reform package that could amend the federal tax exemption for state and local debt, it is highly likely the federal government will continue to provide substantial subsidies for municipal bonds, she said.
Neglect of public infrastructure by states has serious economic consequences as roads crumble, school buildings become obsolete, and outdated water treatment facilities jeopardize public health, she said.
“Every state needs infrastructure improvements that have potential to pay off economically in private sector investment and job growth,” McNichol said. “But rather than identifying and making the infrastructure investments that provide the foundation for a strong economy, many states are cutting taxes and offering corporate subsidies in a misguided approach to boosting economic growth.”
A separate report from Ball State University’s Center for Business and Economic Research contends that the combination of current low gasoline prices and more fuel-efficient vehicles make this a good time to raise gasoline taxes in Indiana.
The Indiana House approved a bill earlier this month that would increase the state’s gasoline tax by 4 cents from the current 18 cents per gallon and the diesel tax by 7 cents from the current 16 cents per gallon, while indexing them to inflation.
“Gasoline excise tax revenues have not kept pace with the economy as a whole due to inflation and changes to technology that reduce revenues without an associated impact on costs,” said Michael Hicks, author of the study and director of the research center. “An increase in gasoline taxes of 5 cents will have no appreciable impact on key measures of employment or GDP in Indiana.”