Gas Tax Bill a Windfall for Infrastructure Bank

PROPONENTS CLAIM THE BILL WOULD FIX SOUTH CAROLINA’S ROADS. THAT’S NOT WHAT THE BILL SAYS.

[NB: The bill discussed in this report is now law, the state senate having overridden the governor’s veto.]

The legislature is poised raise the gas tax, along with sales tax on vehicles and several registration fees. Proponents claim the 72 percent tax hike will be used to repair damaged roads and bridges, but the bills passed by both House and Senate don’t guarantee that. In fact, the legislation sets the stage for most of the new revenue to be diverted to the State Transportation Infrastructure Bank, or STIB.

How the gas tax hike could end up as a bailout for the controversial STIB is a matter of legislative maneuvering. If lawmakers wanted to raise taxes and use the revenue for road repair and maintenance, the bill could have quickly and cleanly directed dollars to the Department of Transportation for the sole purpose of repairing roads and bridges in order of priority. Instead, the bill shifts language – and dollars – in a way that’s deeply complicated.

There are three major red flags in both the House and Senate bills that signal the intention to use the money for projects bonded by the STIB: changing taxes to “fees,” shifting revenue streams from the Department of Revenue to the Department of Motor Vehicles (DMV), and creating a new “trust fund” from which dollars can be directed to paying down bond debt. Those convoluted maneuvers, given the legislature’s history in this area, signal trouble even beyond the impact of the tax hike.

Taxes or “fees”?

Calling taxes “fees” instead of taxes supposedly makes the revenue raised by this legislation “non-tax” revenue – which happens to be the only kind of revenue the state constitution permits to be used for revenue bonds.

The legislature not only refers to the gas tax as a “fee” but also changes existing sales tax on some vehicles (large commercial vehicles, buses, etc.) to a “fee,” and changes the law so that taxes on cars become fees. But state law clearly defines a fee as “a charge required to be paid in return for a particular government service or program made available to the payer that benefits the payer in some manner different from the members of the general public not paying the fee.”

In fact, a 2015 opinion by the state attorney general’s office clarified the distinction, citing court rulings that a tax on gas was a “true tax” and concluding that despite 2003 legislation to change the gas tax to a “fee” such a designation was not accurate.

So why do it? There is only one reason: the state constitution doesn’t allow revenue bonds to be paid for with tax dollars, meaning they have to be financed by separate revenue streams – i.e., fees. That means universities can borrow against their tuition streams, and revenue collected for toll roads could pay off those roads. But the STIB doesn’t have such a revenue stream and doesn’t collect fees. With this legislation, however, the legislature will have allowed the STIB to borrow revenue bonds by creating funding streams from fees paid to other agencies, specifically the Department of Motor Vehicles. As the Legislative Audit Council noted in 2016, it’s “uncertain whether this process is consistent with the Constitution.”

None of this is necessary to direct public money to road maintenance and repair. That lawmakers have added these convoluted features to an already controversial bill strongly suggests the need for caution. There is a reason revenue bonds cannot be financed outside dedicated revenue sources: to protect taxpayers from risky debt schemes that do not benefit the entire citizenry and for which there is no stable revenue stream.

The Infrastructure Maintenance Trust Fund

The current gas tax legislation does not specifically dedicate most of the new revenue to the STIB (although 80 percent of the Infrastructure Maintenance Fee is made directly available for STIB bonding), but it also doesn’t dedicate the revenue directly to the DOT to fix the roads highest on the priority list – which it easily could have done. Instead, the legislation creates a new fund called the Infrastructure Maintenance Trust Fund, to which most of the new revenue is diverted.

The legislation says the Fund “must be used exclusively for the repairs, maintenance, and improvements to the existing transportation system.” This language is legally vaguer than it may sound. Transportation officials have interpreted the “transportation system” to mean everything from mass transit to bike paths. In addition, “improvements” goes beyond mere repair and maintenance to mean road expansions and any number of other things.

But the real danger of the new “fund” lies in language already existing in the state law into which the new fund is inserted. The DOT commission could elect to divert dollars from the new fund – which is supposed to be for urgent road repairs – into another fund called State Highway Construction Debt Service Fund, the sole purpose of which is to pay bond debt.

The Infrastructure Bank: high debt, low revenue

While it’s clear the funds could be used for the purpose of paying down STIB bonds rather than fixing urgent roads through the DOT, how likely is it that they would be diverted?

There are two reasons that signal high motivation to divert funds toward paying down SIB debt. First, the amount of debt is high. A 2016 review of the STIB by the Legislative Audit Council found that the Infrastructure Bank had “significantly more bonded debt” than corresponding entities in other states. And second, the STIB’s revenue sources are not stable. Indeed, a 2010 Moody’s rating report downgraded the STIB’s credit rating from Aa3 to A1, which likely limits it borrowing power. Hence the rush to make more money available to pay down the STIB’s debt.

Over the past three years the legislature has diverted around $250 million in recurring revenue to the STIB, with much of the revenue coming from DMV fees. (It’s no coincidence therefore that the DMV will receive fee revenue from the new gas tax legislation.) This is a massive influx of cash to the Bank, and with the new money eligible to finance its debt, it seems probable that more borrowing is lined up – borrowing that not only does not benefit the state as a whole, and does not fund repairs and maintenance, but that creates new infrastructure that must be repaired in the future.

The bill’s proponents repeatedly promised taxpayers that the money would to fix their roads. The current legislation doesn’t do that.

It’s evidently written, furthermore, to circumvent the state constitution and state law, and to add more layers of bad practices to those that have been questioned already by the courts, the attorney general’s office, and the Legislative Audit Council. There should be no loopholes in legislation that both raises taxes significantly and purports to fund core infrastructure needs.

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