‘STATE HOUSE ECONOMICS’ AT ITS FINEST
The state’s roads are crumbling, according to the popular refrain, and the Department of Transportation (DOT) claims it faces a nearly $43 billion shortfall between the current year and 2040. This works out to just under a $1.5 billion annual shortfall. To address this problem, Gov. Nikki Haley has proposed an increase in the state’s gas tax to be offset by a 2 percent reduction in the state’s top income bracket phased in over 10 years. Democrats have been quick to criticize the plan, citing a projected annual loss of $1.8 billion in revenue to the state General Fund once the income tax cut is fully phased in.
According to Democrats, the loss of this revenue will result in cuts to services such as law enforcement, health care, and education. The truth is that all of the numbers and plans rely to some extent on flawed premises and unreliable assumptions.
Examining these premises will help us get a more accurate understanding of the state’s transportation infrastructure problem – and thus their potential solutions.
The ‘$43 billion’ shortfall
We’ve all heard about DOT’s nearly $43 billion long-term and $1.5 billion annual shortfall. Politicians and commentators have thrown around these numbers with little or no explanation. Hearing these numbers out of context, one might assume this is the additional funding needed to complete necessary road repairs. It is not that.
The numbers include funds DOT would like to use for expansions and other projects, not just repairs. At a town hall meeting in November, Representative Gary Simrill (R-York) likened the shortfall to a mechanic giving a customer the full restoration price for a car when the customer is more interested in the price necessary to make the car run smoothly. An examination of the broad breakdown of DOT funding needs between now and 2040 would seem to support Rep. Simrill’s analogy. $21.5 billion of DOT’s stated funding needs are for highway expansions; another $5.2 billion is for mass transit. These are hardly necessary expenses for maintenance and repair. When we subtract these expenses from the stated shortfall, the annualized shortfall drops from roughly $1.5 billion to $550 million.
A closer examination of DOT’s report raises questions about the remaining $550 million, too. The $550 million for maintenance and repair as well as the rest of the shortfall is arrived at using the numbers provided by CDM Smith, a company with a significant history with South Carolina’s infrastructure authorities. Other than producing studies, CDM Smith also provides construction and engineering services for clients. The Nerve recently revealed that CDM Smith has received over $13 million in state payments since fiscal year 2012, the large majority of these payments coming from the DOT and the State Transportation Infrastructure Bank (STIB). The group preparing the report claiming the DOT needs additional funding directly benefits from DOT funding.
Apart from this obvious conflict of interest, other evidence suggests the numbers may be inflated. A source with DOT recently provided the Policy Council with a cost estimate DOT gave in 1995 for the construction of four minor secondary roads in Newberry County. DOT estimated the cost to 
construct the roads at just over $1.2 million. Once the project was completed actual construction costs turned out to be $150,000 – an eighth of the original estimate. Granted: this is only one case. But it should demonstrate, if nothing else, that the numbers provided by DOT are not infallible, and common experience suggests that agencies tend to exaggerate their own funding needs.
Meanwhile, statements by other public officials do little to clear up uncertain road funding needs. According to recent document released by the governor, an additional $75 million is needed annually to maintain South Carolina roads in their current state. At a recent meeting of the House Ad Hoc Infrastructure Committee, some House members claimed this figure was closer to $300 million. It seems no one really knows how much it will or should cost to perform necessary road repairs. What we do know is that South Carolina’s road governance structure encourages waste, and many of the projects which add to DOT’s projected funding shortfall are road expansions.
Gov Haley’s tax swap
Gov. Haley’s proposed fix is more of a tax swap than focused infrastructure reform. She wishes to raise the gas tax by 10 cents over 3 years in exchange for lowering the top state income tax bracket from 7 to 5 percent over 10 years. The governor claims this plan will generate the needed funding to fix South Carolina roads and simultaneously provide millions of dollars of tax relief to taxpayers annually – indeed, billions once the income tax cut is fully implemented.
Gov. Haley’s plan includes a tax hike for everyone who purchases gas, but the governor claims this increase will be more than offset by tax cuts elsewhere. Her plan, like DOT’s projections, relies on a number of shaky assumptions. On the political front, Haley is assuming her plan will be implemented without interruption by future legislatures. This is a large leap of faith considering the legislature’s historical aversion to any kind of broad based tax relief. Neither Haley nor the current General Assembly have any way of guaranteeing future sessions of the General Assembly will continue to implement planned tax cuts. In her approach to revenue projections the governor relies on growth figures that are far from guaranteed. Haley’s plan assumes an annual 1 percent growth in the number of income tax filers in in each of 30 different income categories over the course of her 10 year income tax cut phase-in.
Ten years is a long time to project such a steady growth in population, and even if the projection is accurate in terms of raw population numbers there’s no guarantee that a growth in population will be spread out evenly among 30 different income groupings. Gov. Haley’s plan also assumes taxable income will grow annually by 4.3 percent for all tax filers beginning in 2015. Projecting this kind of income growth over 10 years is even more optimistic than assuming uninterrupted population growth. What if we had assumed this 10-year rate of income growth beginning in 2005? We wouldn’t have accounted for a major recession, among other things. The volatility of our economy as influenced by ever shifting federal tax, fiscal, and monetary policy should make us extremely wary of any long-term economic growth projections.
The governor asserts her tax swap will make South Carolina competitive with North Carolina’s tax climate. What Haley doesn’t mention is that her plan would only make South Carolina’s top income tax rate competitive with North Carolina’s after six years of implementation. Further, her analysis assumes both perfect implementation of her plan and a lack of any future tax reforms in North Carolina. 
Finally, when trying to assess the savings to taxpayers from her plan Haley makes the ever popular mistake of judging a tax plan based on revenue.
Gov. Haley estimates the total taxpayer savings from her tax cuts through expected decreases in revenue. Haley claims that, by the time her proposed income tax reductions are fully enacted, taxpayers will have saved around $1.75 billion. But a reduction in state revenue doesn’t mean every taxpayer has more money in his or her pocket. As The Nerve recently pointed out, the annual average of 1 million state tax filers who owe no income taxes will not experience any savings from Haley’s proposed tax cuts. These people would only experience the part of Haley’s plan that increases the gas tax.
This is always the case with tax swaps: Unlike true tax reform, swaps simply shift the tax burden from some individuals to others. The political use of tax policies’ revenue impacts has long been a tool of politicians (including South Carolina politicians) who want to pretend they are delivering tax relief when they are actually shifting the tax burden for the benefit of favored industries or constituencies.
The Democrats’ criticisms
Many of South Carolina’s Democratic state officials have been quick to criticize the tax cut component of Haley’s plan. They’ve claimed that the tax hike portion of Haley’s plan fails to raise needed revenue to fix roads, while the tax cut portion would deprive South Carolinians of vital services. These arguments, too, deserve closer attention. First, the criticism that Haley’s plan fails to raise needed revenue for the DOT takes the agency’s stated needs at face value.
This criticism ignores valid questions about many of the projects that make up the DOT funding shortfall, the method used by DOT and CMD Smith to estimate future costs, and the inefficient and wasteful governing structure of South Carolina’s infrastructure authorities. Second, complaints about how a loss of revenue will harm basic services provided by the state assumes there is no fat to cut from the budget. But the state budget is overflowing with unnecessary spending and outright waste. Last year, for example, the Policy Council identified $644 million worth of spending on non-essential services that could be better spent on road maintenance and repair. Included in this total were items such as the budget of the corporate welfare generating Department of Commerce, the Capital 
Reserve Fund (used as a slush fund for lawmakers to fund pet projects), and hundreds of millions in non-recurring budget provisos.
The state could also save money over the long term by transferring funds currently dedicated to the State Transportation Infrastructure Bank, or STIB – an agency that uses bond debt to finance often unnecessary road expansions in politically important counties – to the DOT.
Not only would the DOT receive added funds: maintenance funding would no longer need to be spent on unnecessary STIB-financed expansions, and the state would need to allocate less future revenue to paying off debt generated by the STIB. The savings realized by this debt reduction could be funneled back into road maintenance and repair.
Whose assumptions?
Whenever a group advocates for an increase in public funding or political power, citizens should ask themselves two questions: What assumptions are they making, and Qui bono – Who benefits? On the issue of funding for roads, the answers to both these questions is less than encouraging. Fortunately, there are steps elected officials can take right now to begin remedying the state’s dire infrastructure problem.
These steps don’t benefit one constituency, one consultancy firm, or one cadre of politicians. They benefit South Carolinians who pay ample taxes and have a right to expect their roads and bridges to be properly maintained.
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