Tuesday, March 5, 2013

Maryland Cannot Afford to not Invest in Infrastructure

Last year, I criticized Governor O'Malley for proposing an increase in the gas tax in the midst of a weak economy. O'Malley's proposal went nowhere last year as neither Senate President Mike Miller or House Speaker Michael Busch were particularly interested in pursuing the increase.

This year, things are different. O'Malley, Miller, and Busch held a joint news conference today to announce a plan for infrastructure investment in Maryland. Under the plan worked out by the three party leaders, a new 2 percent sales tax on gasoline would be applied starting in July. The tax would increase to 4 percent in July, 2014. O'Malley's plan also would reduce the current excise tax on a gallon of gas by 5 cents, from 23.5 cents to 18.5 cents. The plan would then index the excise tax to the consumer price index to adjust for inflation.

The proposal is expected to generate $3.2 billion over 5 years to be dedicated to highway and transit projects. And make no mistake, Maryland is desperate need of infrastructure investments. A 2009 report card on Maryland's infrastructure found:
  • 44% of Maryland’s major roads are in poor or mediocre condition.
  • 55% of Maryland’s major urban highways are congested.
  • Vehicle travel on Maryland’s Interstates increased 52% from 1990 to 2004 while lane miles increased only 21%.
  • 29% of Maryland’s bridges are structurally deficient or functionally obsolete.

 My prior criticism of O'Malley's proposed gas tax increase was as much based on the weak economy as it was on the very regressive nature of excise taxes. Simply stated, excise taxes such as a gas tax or a sales tax on food or clothing has a disproportionately negative impact on lower income and working class folks. These folks have less disposable income to begin with and the added tax burden makes their situation worse. The couple hundred dollars lost each year to sales and gas taxes means a lot more to person earning $20,000 per year than it does to someone earning $150,000.
Make no mistake, the new O'Malley, Miller, Busch plan will place a serious burden on working class Marylanders. The plan would essentially place two taxes on the purchase of gas - a flat tax imposed per gallon that would increase with inflation (meaning it would likely increase every year) and a 4% sales tax applied to the total purchase. This means that as the price of gas increases, the additional charge generated by the sales tax will increase.
The flat tax indexed to inflation is perhaps the more troubling of the two - we have been blessed with relatively low levels of inflation for well over a decade, but there is no reason to assume that inflation will not return. The Federal Reserve has been pumping hundreds of billions of dollars into the US economy and should we emerge from the current economic slowdown higher rates of inflation are quite possible. The Federal Reserve engaged in aggressive monetary policy in the 1970s as well and it contributed to several years of double-digit inflation. Should we experience a few years of high inflation, that newly adjustable flat tax is going to hurt. It would be better to simply eliminate the flat tax and replace it with a sales tax.
Criticisms and concerns aside, Maryland cannot afford to not make changes in infrastructure funding right now. Virginia recently enacted a major funding bill that will generate $3.5 billion in infrastructure funding. Maryland cannot risk remaining idle while Virginia invests billions in infrastructure upgrades. Such investments are crucial to attracting businesses as well as new federal investment - like a new FBI headquarters.
The infrastructure funding bill will hurt, but failing to take the initiative now will hurt the state far more in the long run.