Maine faces an annual shortfall of $232 million annually to fund priority transportation infrastructure projects, with the largest unmet needs in bridge projects and highway reconstruction.
This year, a Blue-Ribbon Commission is working to identify long-term funding solutions. Meanwhile, Gov. Janet Mills has proposed transferring $10 million of General Fund money to Maine DOT to help fill the gap. Legislative Republicans have signaled they want an even larger buy-in, perhaps up to $200 million, of General Fund dollars for transportation infrastructure.
Using General Fund money this way would be unusual and unwise. These proposals would reduce funding available for the urgent needs the General Fund is designed to meet and are an ineffective way to fund long-term transportation needs. Instead of siphoning General Fund dollars away from where they are most needed, Maine should turn to tested, effective means of funding long-term transportation capital projects: Bonding and fuel taxes.
General Fund transfer is a flawed, short-term solution to long-term needs
If a transfer is approved, it would be the first time in more than 20 years that General Fund revenue has been diverted to capital highway projects.1 Capital investments are a long-term investment and should be funded with long-term financing or sustainable revenue streams dedicated to those projects. General Fund revenue misses the mark on both fronts.
Even if there were enough General Fund revenue to make a meaningful dent in the state’s infrastructure needs — which there is not — every dollar diverted from the General Fund without accompanying new revenue means one less dollar available to meet today’s needs. $10 million is the equivalent of state cost of education for nearly 1,500 children,2 or health care for nearly 8,800 people in the Medicaid Expansion program.3
Bonding allows more investment, makes tax dollars to go further
Bonding is particularly appropriate for infrastructure projects, because such projects boost economic activity and generate additional tax revenue to fund debt service.
Imagine a family whose home needs renovations. The roof is leaking, the wiring is failing, and the home heat escapes through insufficient insulation and old windows. That family could use whatever money is left after covering bills every month to make small improvements as they’re able. But while they slowly chip away, their fuel bill is more expensive in the winter, power outlets grow less reliable, and the leaky roof causes water damage.
This plan might appeal to some because it avoids debt. But it allows existing problems to compound and creates greater overall cost in the long run. Instead, the family could take the extra money they have each month to secure and pay off a loan that allows them to make all the renovations necessary to stay safe and to have a reasonable quality of life.
For more on why bonding is smart for Maine, see our recent Policy Basics brief.
This rough analogy illustrates why bonding is a smart strategy to finance capital projects. Governor Mills’ proposal would fund an additional $10 million worth of capital projects. Maine’s annual $232 million transportation funding shortfall exists even after factoring in an annual $100 million bond. The Department writes: “… the fiscal reality is that MaineDOT is now competently managing a slow decline of our transportation system until bipartisan funding solutions materialize.”4
The General Fund dollars in question could be stretched much further if it were dedicated to bond service. An annual payment of $10 million would allow Maine to sell a 10-year bond worth almost $80 million.5
Maine has plenty of capacity for additional bonding. According to the State Treasurer, Maine’s taxpayer-supported bonding remains below the national median as a share of statewide personal income.6 Interest rates for state bonds also remain historically low. Maine has a good credit rating with the major ratings agencies, and federal reserve benchmark rates for borrowing are still very low. Now is a perfect time to borrow and make repairs.
Fuel taxes provide long-term, sustainable funding for infrastructure
Reliance on borrowing alone would not be enough to meet state need. That’s why the Highway Fund has its own dedicated revenue streams. By far the largest of these is the tax on vehicle fuels, including the gas tax and the tax on special fuels, such as diesel.
The gas tax and special fuels tax comprise more than three-quarters of the highway fund.7 It will be difficult – if not impossible – to meaningfully increase highway funding without increasing the fuel taxes.
Fuel taxes are not a perfect source of state revenue. They are regressive, meaning that low-income Mainers pay a higher share of their income in taxes than the wealthy.
On the other hand, fuel taxes have some special characteristics that help offset their impact on poor Mainers. They are highly exportable, with just under a quarter of gas tax revenue generated by tourists.8 Meanwhile, vehicles that cause the most wear-and-tear on roads — such as commercial trucks — generate one-fifth of the revenue.9
Before 2012, Maine’s gas tax was tied to inflation. Annual adjustments ensured that as costs for roadwork increased, so too did revenue from the gas tax. The Legislature’s decision to decouple the tax from inflation has cost Maine $184 million in lost revenue – about $80 million of which has stayed in the pockets of freight company owners and out-of-state tourists.10
The current gas tax of 30 cents per gallon is low by historical standards. Once you adjust for inflation, Maine’s gas tax was the equivalent of 69 cents per gallon in 1947, and just under 57 cents per gallon as recently as 1971.11 In some states, the tax is 50 or even 60 cents per gallon. In neighboring Canadian provinces, it’s even higher – almost 90 (US) cents per gallon.
Conclusion
Diverting General Fund monies toward long-term infrastructure projects would be a poor use of resources best suited for addressing today’s needs. Instead, legislators should look to bonds and fuel taxes to more effectively and sustainably fund capital investments in Maine’s transportation system.
Notes:
1 The budget for FY2000 appropriated $5.8 million for capital expenditures of highways and bridges. See https://www.maine.gov/legis/ofpr/general_fund/approps_expend/0001_gf_detail.pdf
2 MECEP analysis of Maine Department of Education data. Based on total General Purpose Aid for schools of $1,168,444,478 in FY21, and enrollment of 182,597 students in Maine public schools, for a total of $6,399 per pupil in GPA.
3 Based on enrollment and general fund spending figures from the Office of Fiscal and Program Review for Q1 of FY 2021. Average general funding for the Medicaid population during this period was $285 per person for the quarter, equivalent to $1,140 on an annualized basis. See http://legislature.maine.gov/ofpr/other-fiscal-information/9311
4 “Maine Department of Transportation Three-Year Work Plan: 2020 Edition.” See https://www.maine.gov/mdot/projects/workplan/docs/2020/WorkPlan2020_2021_2022%20Jan_14_2020.pdf
5 Based on the November 2019 statement from the state treasurer on the passage of the $105 million transportation bond. See https://www.maine.gov/treasurer/debts_bonds/docs/Treasurer%20Statement%20Nov%202019-Corrected.docx
6 See https://www.maine.gov/treasurer/debts_bonds/debt_summary.html
7 MECEP estimate based on Maine Revenue Forecasting Committee December 2019 report, estimate for FY 21. See https://legislature.maine.gov/doc/3567
8 MECEP analysis based on Maine Office of Tourism data for 2018. “Maine Office of Tourism: Visitor Tracking Research 2018 Calendar Year Report.” See https://motpartners.com/wp-content/uploads/2019/06/2018-Annual-Report.pdf
9 MECEP analysis of revenue forecasting commission, December 2019 data. See https://legislature.maine.gov/doc/3567
10 MECEP analysis of Maine Revenue Forecasting Commission data for state fiscal years 2012 through 2020. Lost revenue was calculated by estimating the hypothetical gasoline tax rate based on annual adjustments using the Consumer Price Index. The share of this lost revenue attributable to tourism was calculated using Maine Office of Tourism data on average gasoline spending by tourists and number of tourist visits each year. The share attributable to commercial vehicles was based on the share of the total fuel tax accounted for by the special fuels tax and road use fees.
11 MECEP analysis of historic gasoline tax rates in Maine, adjusted using the Consumer Price Index. See https://legislature.maine.gov/doc/3542
