Does Michigan Tax Itself Enough for Roads?

Most people like the thought of being at "the top" of a list. But sometimes, it may be better to be near the bottom.

In a recent study from the federal Department of Transportation, Michigan placed 45th among the 50 states in the "level of effort" we make to finance road improvements. That sounds bad, and Michigan certainly has a backlog of road needs. A closer look, however, suggests that taxpayers should regard the phrase "level of effort" as Washington’s newest bad idea. How much we tax ourselves is simply not the best way to assess how a state cares for its transportation infrastructure.

States were ranked in the study according to how high their fuel taxes are, and how much of their "taxable resources" is spent on roads. At the top of the list were low-tax, largely rural states like Iowa, South Dakota and Kansas. Also near the top were high-tax states like Delaware, New York, Pennsylvania and West Virginia. Congressman Nick Joe Rahall (D-West Virginia) concluded that states like Michigan were "not exactly stellar performers" at satisfying road needs. He stated that our state makes little "effort" toward solving road problems, and therefore doesn't deserve to get much of its federal fuel taxes back. He wants states to have to pass a "level-of-effort" test to determine how much of those taxes are returned from Washington.

This sounds superficially like a good idea. Many programs require a state to put up its own money as a condition of getting a matching grant. But level-of-effort tests are different: they require that local or state taxation be kept high in order to get federal funds. Such tests would require states to keep taxes at a certain rate, or devote a certain percentage of their tax revenue or their total wealth to financing a particular program.

When level-of-effort tests are used, states won’t get their federal tax money back unless they tax their own citizens to buy something Congress wants. Level-of-effort tests are, in effect, a sneaky way for Congress to force its priorities on the states, and send the states the bill. As Congress tries to balance the federal budget, it may very well turn to level-of-effort tests as a way of transferring costs to the states, while keeping control in Washington.

The truth is that "level of effort" is not even an honest description. The test does not measure effort. It measures taxation and spending—not actual results. States that get big results from small expenditures will do poorly on a "level-of-effort" test. States that save money and satisfy needs by relying more than others on the private sector will get little credit. High-tax states that spend money inefficiently will be rewarded with more federal dollars, regardless of how wasteful their efforts may be.

Furthermore, there is nothing in the level-of-effort test about needs. A state or city may not need to devote a big share of its tax revenue to street repair, pollution prevention, job training, or whatever cause Congress may try to promote. Other needs may take precedence over the purpose for which the handout is offered. But the prospect of a big federal handout can warp local priorities. State and local politicians hate to leave federal money on the table; their political opponents will make them look bad unless they claim every possible "free" federal grant, regardless of its true cost. Matching grants are bad enough in this regard, but level-of-effort tests create an incentive for high taxes and a permanent, large public sector.

In the future, we may see level-of-effort tests written into environmental programs, social welfare schemes, and transportation legislation, unless we demand that our tax money not be used as a lever to force ever-higher local taxation. Perhaps Michigan should kiss federal handouts goodbye before we raise taxes just to get them.

States’ needs are all different. Congress should not hold federal funds hostage to high taxation without regard for local needs. Deciding how much to tax ourselves to remedy our potholes and congestion is our choice, not Washington’s.