Voters may be coming around to the idea that government needs their money to keep public works up to speed.

Voters may be coming around to the idea that government needs their money to keep public works up to speed.
March 2006
John E. Petersen
By John E. Petersen  |  Columnist
John E. Petersen was GOVERNING's Public Finance columnist. He was a Professor of Public Policy and Finance at the George Mason School of Public Policy.

In the swift, if shallow, downturn of 2002, state finances suffered. Not just from declining revenues but also from a freezing over of ability to move ahead with initiatives to accommodate changing times. Faced with sharply emerging deficits, the states, which had assiduously lowered tax rates in the late 1990s, took the only path politically possible--they chopped spending. Overall, states stopped expenditure growth in its tracks for a couple of years. Capital projects and maintenance were delayed. User charges and fees (such as college tuitions) surged.

Now, one by one, many states have gone back to the voters with a new message: We cut where we could. With an improving economy and unmet needs, we need to raise more money. And many voters' attitudes may be softening. Maybe they recognize the value of what government does for them and--just maybe--they are more willing to pay for it. The cut- taxes-at-any-cost faction seems to be losing steam as new alliances are formed to address public-sector needs.

It's too early to declare springtime in Public Finance Land. But if there is a thaw, one of the beneficiaries is likely to be infrastructure. Nationally we have invested sparingly in public works of late--a bit less than 2 percent of the GDP. Years ago, that share was more like 2.5 to 3 percent. Moreover, the lower spending levels of the past 20 years have not been sufficient to maintain, much less deepen, the existing stock of public capital. Experts have pleaded that disaster lurks behind such numbers. For example, recent spending in real per capita terms on dams and levees is about half of what it was in the late 1990s.

The devastation wrought upon the Gulf Coast by Katrina did what any number of academic pleadings could not do. It put a face on what happens when years of under-investment, lack of planning and poor accountability encounter a natural disaster of seismic proportions. Suddenly, the need to properly design and invest in vital infrastructure (in this case, strategic levees and retention of natural storm barriers) becomes abundantly clear.

It is not surprising that California Governor Arnold Schwarzenegger, in an effort to unfold a bold and positive vision of state government's potential, is taking note of California's creaky infrastructure, including the flood-prone areas around Sacramento. His latest budget proposes ambitious new infrastructure spending--and bond issues to go with it.

Then there is the question of our addiction to oil, a point emphasized by President Bush in his State of the Union address. What went unmentioned was a major lever on that addiction: motor fuel gas taxes, most of which goes into a trust fund to finance new projects. Talk about market-friendly: Taxes induce consumers to save money by seeking alternatives and deciding on the best solution. Gas tax rates have barely budged in the past decade while funds for new construction have melted away under the burden of simply maintaining what we have. Highway construction spending on a price-deflated per capita basis has been on the decline for the past five years.

Since adjacent states compete on gasoline sales, in the absence of an overarching federal approach, regional ones are needed to achieve more rational levels of motor fuel taxation. The contrast between the growing public penury in motor fuel tax receipts as compared to the record-setting profits of the major oil companies, while perhaps simplistic, is staggering.

Exxon's 2005 profits of $36 billion alone were equal to the total of all state and local motor fuel taxes collected last fiscal year.

None of the above is to be taken as an indication that state legislatures or city councils will be running out to shop 'til they drop, that they'll open the public wallet wide enough to finance their own bridges to nowhere. On the contrary, the real thaw may be in the application of pragmatic thinking and long-term planning. Raising revenues to meet needs may once again be seen as a necessary part of governance, as opposed to an unacceptable option. Citizens of Denver and its suburbs, for instance, voted to raise taxes to support a new mass transit system, and Colorado voters suspended an onerous constitutional cap on state spending. If it happened there, it could happen elsewhere.

Voters, mindful of an aging nation and its unaddressed challenges, are having second thoughts. They may finally be seeing that they can't count on a something-for-nothing government.

Government need not be big, but it needs to be strong, responsible and far-sighted. It needs to take care of those matters that are beyond the grasp and power of individuals to do themselves. And it needs money to do that.