Famine in time of plenty

Summary

This is another of my long discursive posts, a lament on the ugly policy effects of dedicated highway funding, flawed tax design, and the tax pledge. Great, if you like bad roads and encouraging carbon emissions:

• The forecast good times for the general fund surplus do not extend to the dedicated highway funds. The February forecast predicts highway revenues will decline in real terms for the FY 2017 to 2027 period.
• Failure to index the gas tax is a big deal. In real terms (adjusting for inflation), its rate is at a historical low point, rivaled only by the period before the 2008 rate increase. If the legislature had indexed 1988 rate for CPI inflation, the highway funds would have collected over $6 billion more in revenues through FY 2022. It would have been unnecessary to raise the rate in 2008 (the enacted increase would have been a cut). FY 2022 revenues would have been about a half billion dollars higher.
• For decades dedicated highway funding worked well with grudging bipartisan support for periodically raising the gas tax to keep pace with inflation and highway needs. That ended when Grover Norquist’s tax pledge became the core fiscal principle of the Republican Party.
• A natural political impulse is to divert general revenues, like the motor vehicle sales tax, to the highway funds. That undercuts the rationale behind user funding and has still been insufficient to meet the needs.
• The political prospects for a sensible solution are grim. Hello more deferred road maintenance and higher carbon emissions.
• Because 38% of the dedicated revenues go to counties and cities, the state legislature bears much of the responsibility for poor local roads in places like St. Paul, not just local decision makers.

I wrote the initial draft of this before Representative Elkins wrote his Strib Op-Ed and Bill Lindeke his MinnPost column on why Minnesota streets are underfunded. Their views on the gas tax largely algin with mine and are more concise and to the point.

Introduction

Three recent events caused to me reflect on the varying fortunes of the general and highway funds:

• The February forecast predictions of $750 million more general fund revenues following on the November surfeit
• St. Paul’s request to increase its city sales tax to pay for streets (Strib story, bill)
• A Republican legislator borrowing from a star Democrat, Gretchen Whitmer, in tweeting at the St. Paul mayor about the need to spend more on city streets (MinnPost story)

General fund revenues surge; highway fund lags

The 10-year growth of the general fund is twice that of the highway user tax distribution fund (HUTDF), based on actual data and the February forecast through FY 2027. See the graph below. When stating the growth in inflation-adjusted terms, the general fund growth looks more normal (about 15% for the period or a 1.5% annual real growth rate) and the highway fund is shrinking in real terms, thanks to inflation (I used IHS’s estimates for future inflation). Because much of the difference is attributed to the gas tax, I included its growth rate separately. As the graph shows it’s shrinking even in nominal dollars. I assume that is because of estimated growth of EVs. Whether that actually happens is probably open to question.

The varying fortunes of the two funds by biennium (same data) are shown in the next graph. The pandemic dip in driving’s effect on gas tax revenues is clear in 2020-21.

A political perception problem

This is a political problem because public expectations are not nicely sorted into fund buckets, mirroring legal budget rules. When general fund resources are flush, the public thinks all is good fiscally. Legislators can fall into this trap too, as evidenced by Representative Franson’s tweet. There is a tendency to forget that 38% of state highway fund revenues go to cities and counties for their roads. So, the state is partially culpable for inadequate city streets.

Given that reality, it is useful to review some of the underlying realities of Minnesota’s financing for roads. The basic story is that highway financing relies on dedicated, inelastic taxes that are difficult to increase politically to keep pace with spending needs. Putting that in layperson’s speak, highway fund revenues do not keep pace with either inflation or economic growth. That is especially true for the gas tax, which is set in cents per gallon. As a result, revenues lag expectations for highway and road spending, even by limited government, anti-tax Republicans. Constantly making do with less shows up in lower quality services (read, potholes, congestion, more dangerous intersections, etc.).

The worst of fiscal worlds

The practical effect is an unholy combination – underfunding of highways and roads while stimulating more demand for them by holding down gas prices. (As an aside, this cheap gas policy is also a federal feature; Congress has not increased the federal gas tax since 1993 and administrations, Democratic and Republican, use executive actions to hold down oil prices in various ways, recently by easing environmental restrictions on fracking, management of the petroleum reserve and authorizing Alaskan drilling.) That makes nobody happy – neither those of us concerned about climate change and want the existing system maintained nor deniers who want to drive big vehicles farther on better roads.

The big general fund surplus – much of it one-time – will lead to more demand to shift highway funding to general revenues. That has been the trend over the last 30+ years. A couple years ago, I did some basic math to document how much of highway funding comes from general revenues, not user charges or benefit taxes, here. Almost 60% of highway and road funding comes from general revenues (FY 2018 data), like sales and property taxes. That situation is only getting worse.

In praise of user-based highway financing

Before getting into why the system is breaking down, it is useful to briefly consider the benefits of a system of user-based financing. None of us, whether you’re a small government conservative or a proponent of more expansive government, should be happy with slouching away from that system. It helps ensure a right-sized and adequately funded road system, something that is essential to a robust state economy, when it operates as intended as it typically did during its first 70 years.

Since the 1920s, Minnesota has relied on constitutionally dedicated taxes to fund highways, streets, and roads. The centerpieces of that funding are gas and license taxes. We are now approaching about a century of using that model in various configurations. During most of the history, the motor fuels or gas tax was the workhorse, providing most of the revenues.

Dedicated funding provides insulation from the overall budget allocation decisions, while largely ensuring that users of highways and roads pay their own way. It was partially premised on a political expectation that if the public wanted better or more highways and roads, they should be expected to pay more in user and benefit taxes. Reasonable tradeoffs, I think.

The system worked well for decades with increasing purchases of cars, trucks, and fuels and the legislature periodically raising tax rates to keep pace with inflation and highway use. At times, the gas tax worked so well that the legislature tried to divert its revenues to nonroad uses. There is a line of Minnesota Supreme Court cases on this issue from the mid-20^th century that curbed those efforts.

This is a virtuous system, if you believe (as I do) that the market is the best way to assess what people want and/or are concerned about climate change. Paying for highways and roads is embedded in fuel prices and that helps people choose where they should live and work, what vehicles to buy (Hummer or Prius?), how much they should drive, whether to ship by rail or truck, etc. That encourages better (more efficient in economic terms) decisions. It also is a mini-carbon tax that ever so slightly internalizes the external costs of burning fossil fuels.

Yes, the taxes are somewhat regressive, but that’s okay for user-based taxes and can be offset by other progressive taxes, like the income and estate taxes, and by the progressive benefits of much other state spending (education, health, and social services) to the extent financed with regressive state taxes, like the sales and excise taxes.

Politics expose structural flaws

That system began unraveling in the 1990s. An apparent political consensus no longer expects highway and road users to pay, but instead favors more reliance on general revenues. But the constitutional and statutory structure was stuck in dedicated funding mode. The natural response of highway and road supporters was to advocate dedication of new, but general revenue, sources. (To be fair, many advocates supported gas tax increases, only turning to general revenues when that proved politically impossible.) Elected officials responded to these entreaties – by submitting a 2006 constitutional amendment to the voters, which was approved and dedicated 60% of the sales tax on vehicles for highways and roads, and by statutorily dedicating other bits and pieces of the sales tax.

Aside on why the motor vehicle sales tax is not a user fee or benefit tax. The sales tax is a broad-based consumption tax that goes to the general fund. Revenues from the sale of one or few commodities are not a user charge or benefit tax for government services related to those commodities. That would be like dedicating the sales tax on residential building materials to housing programs and claiming doing so is a user charge or benefit tax. Dedicating the sales tax on cars simply diverted general revenues to highway uses. Imposing a higher sales tax rate on car purchases and dedicating the resulting revenue, though, would be a type of benefit tax.

To get to the point, why did this occur? Two basic factors caused this turn of fiscal events:

• Structural flaws in the gas tax, the principal source of highway funding for decades
• The takeover of the Republican Party’s fiscal agenda by Grover Norquist’s tax pledge

Factor #1: Flaws in the gas tax structure

Taxes classically are evaluated against a benchmark of principles – equity, efficiency, simplicity, and revenue adequacy. With respect to equity, the gas tax is regressive but as a user charge or benefit tax it is still fair. This may be hard for progressive types to accept if they don’t accept the principle of user financing. I don’t argue with the underlying values favoring progressivity, but I would observe that the highway and road system can be analogized to municipal utility charges – most would not think its rate structure should be progressive (e.g., based on users’ incomes, rather how much electricity, water, or gas they use). The same general concept applies to the road system. Put another way, dealing with income distribution problems can be more effectively dealt with in other ways than highway funding.

With regard to efficiency (as economists use that term), user-based charges are the gold standard since they are calibrated to the use of the funded services and mirror efficient market allocations. The gas tax also scores highly under simplicity and ease of compliance and administration. It’s easy to impose and collect from a small number of wholesalers.

But when it comes to revenue adequacy and the details of how it functions as a de facto user charge, its flaws appear:

• Autopilot tax cuts. The tax is expressed as a fixed dollar amount per gallon. Because this dollar amount is not indexed for inflation, inflation erodes revenues. Essentially, it provides tax cuts on autopilot. That is a very bad thing when highway and road quality depends on it.
• Unadjusted for changes in fuel efficiency. Fuel consumption is strongly correlated with use and thus the gas tax works as a de facto user fee. But it needs to be adjusted for changes in fleet fuel economy. It never is. So, as fleet economy has improved markedly – partially because the feds mandated it – users drive more miles without paying more. Moreover, as users switch to EVs, the tax fails altogether as a user fee. (That can be fixed easily with some sort of separate charge for EVs; there already is a modest annual amount. It could be increased or scaled to actual use by mandating use of a mileage transponder.)
• Too low for trucks, buses, and other heavy vehicles. Fuel usage is correlated with vehicle weight (heavier vehicles use more fuel), but not nearly enough. So, very heavy vehicles (trucks and so forth) do not pay enough for the damage they cause to highways and roads. Vehicles cause a lot more road damage as weight increases. Taxing diesel, typically used by heavy vehicles and containing more energy than gasoline, at the same rate as gas makes this worse. The tax on diesel should be higher than on gasoline to compensate for the damage done by heavy trucks. A fair number of states and federal government already do that. There is a good policy basis for it.

Over time, the first two flaws, combined with legislative reluctance to raise the tax rate, have been deadly for the adequacy of highway and road financing, while they encourage more consumption of fossil fuels and CO² emissions. The latter effects are hard to reverse because they become embedded in long-run commitments that cannot be easily reversed – where housing is built relative to jobs, the contours of the vehicle fleet, and similar.

Failure to index the tax rate

The failure to index the tax for inflation is the biggest problem. It means the legislature must go through the politically fraught task of regularly enacting tax increases. It did that for years until appearance of extreme polarization and tax aversion (mainly by Republicans but infecting the entire body politic) starting in the late 1980s. This has resulted in systematic erosion of tax revenues.

I went through two simple exercises to illustrate the erosion:

• Estimating how much revenue would have been collected if the 1988 gas tax increase had been indexed for inflation; and
• Recalculating what all the previous gas tax rate increases would be in 2022 dollars.

Both exercises show the big effects that inflation’s auto-pilot tax cuts have had on the revenue adequacy of the gas tax.

Indexing the 1988 rate increase. The 1988 rate increase was the one last enacted before Grove Norquist’s anti-tax shtick overtook the GOP fiscal agenda. The DFL did have trifecta control in 1988, so Republican votes were not needed to pass the increase. But after the 1990 election, the DFL did not regain full control until the 2011 legislative session and by that point an intervening gas tax increase had been enacted over Tim Pawlenty’s veto with some GOP support. But it was insufficient to restore the rate to its real (inflation adjusted) 1988 level.

To estimate the lost revenues, I went through a simple arithmetic recalculation of each year’s revenue: (1) indexing the 1988 rate indexed to the general CPI, (2) multiplying by the number of taxable gallons, and (3) subtracting the actual collections. Because this simple calculation ignores the effects on demand of imposing higher tax rates (i.e., the desired side effect of lower consumption and carbon emissions), the estimate is an upper bound. I don’t have a feel for how much demands would be dampened, but I would guess the difference would be material but not dramatically different (whatever that word salad means). By contrast, the reduced revenues are quite dramatic. Expressing it two different ways:

• The highway funds (FY 1990 to FY 2021) would have collected $6.7 billion more.
• In FY 2021 the highway fund would have collected $500 million more.

Those revenues would have made a big difference in state and local highway spending and quality. $6 billion more in spending (cutting back the estimate of consumption by 10%) would have allowed rebuilding a lot of roads, fixing dangerous intersections and stretches of highways, and similar.  At the same time, it would have modestly reduced CO² emissions and global warming. The 2008 rate increase would have been unnecessary; the enacted 29 cent/gallon rate would have been a cut, not an increase.

Restating past rate increases in 2022 dollars. The table below shows the years in which the gas tax rates were increased and what the rate would be in 2022 dollars. It shows how low the current gas tax rate is. To put a fine point on it, the real rate has only been lower before the 2008 rate increase.

Per gallon gas tax rates – as enacted & in 2022 $
Year of rate increase	Tax rate when enacted	Tax rate in 2022 dollars
1925	0.02	0.34
1929	0.03	0.52
1941	0.04	0.81
1949	0.05	0.63
1963	0.06	0.58
1967	0.07	0.62
1975	0.09	0.50
1980	0.11	0.40
1981	0.13	0.43
1983	0.16	0.48
1984	0.17	0.49
1988	0.20	0.50
2008	0.29	0.39

The 1949 and 1962 rate increases imposed an effective tax rate that was twice as high as the current 29 cents/gallon rate. (I’m ignoring the 1941 rate increase as an outlier reflecting the anomalies of the Great Depression.) I would also observe that (1) Minnesotan’s incomes were much lower back then and (2) the vehicles had much lower fuel efficiencies, so they were burning many more gallons to go the same number of miles we do now. This underlines how light or easy the gas tax burden is now. You would never believe it based on the political rhetoric.

A general pattern of the rate increase is that most set the tax at about 50 cents/gallon in 2022 dollars. That’s the level proposed by Governor Walz in 2019, which was politically courageous (or naive) since the chances of enactment with a GOP Senate were essentially nil and the proposal would likely be a negative for his reelection campaign.

All the structural flaws in the tax could be easily fixed as a technical matter – the rate could be indexed for inflation, adjusted for changes in fleet fuel efficiency, and a higher rate imposed on diesel fuel as many states already do – if there was the political will do so. There isn’t, which is a segue to Factor #2.

Registration and sales taxes don’t help much

The other two main sources of dedicated highway do not have much of an indexing problem. The sales tax is a percentage of the purchase price and so rises with inflation. The license tax is a percentage of the manufacturer’s list prices, less an annual depreciation allowance. So, it also has a measure of inflation-proofing. However, the minimum amount that applies after a vehicle is fully depreciated is a fixed dollar amount. Thus, it erodes over time, a problem, since a lot of vehicles pay the minimum. I did not look up numbers, but the increased durability of cars and the rising prices of new vehicles mean that the average age of the vehicle fleet keeps increasing. That means more older vehicles paying the minimum fee are on the road. In any case, both taxes have elasticities below 1. That means they do not grow as overall economic growth or increases in incomes. Demand for roads is more sensitive to economic and income growth than price inflation.

Factor #2: The tax pledge

I have already extensively inveigled against the tax pledge (see here, e.g.), so I will focus on the gas tax.

The pledge. In the mid-1980s, Grover Norquist, the founder of Americans for Tax Reform (ATR), had the brilliant political (and awful policy) idea of getting politicians to sign a pledge that they would never raise taxes. The current version of it for state legislators is simple:

I pledge to the taxpayers of the state of [state name] that I will oppose and vote against any and all efforts to increase taxes.

ATR’s website

The pledge has gone through different formulations but is ironclad. It allows for revenue neutral tax reforms, that is, raising one tax or a feature of a tax that is offset by cuts in that or another tax. It does not allow for increases to offset the effects of inflation. Thus, for a tax like the gas tax (or Minnesota’s excise taxes on alcohol and cigarettes) expressed in fixed dollar amounts, it is a pledge to cut taxes whenever there is inflation.

The pledge relatively quickly came to be adopted as an article of faith for Republican candidates for state office. As an aside, that should be somewhat surprising because it does not reflect the views of party’s supporters. Taxes pay for government. Unless taxes keep pace with economic growth, insisting not increasing them will shrink government, Norquist’s explicit goal, a commitment to fiscal libertarianism.  Surveys shows that only a small percentage of Republicans buy into that view. Trump’s solid support by the GOP base, as a populist opposed to cutting entitlements, is another data point illustrating the lack of core party support, outside the likes of ATR, the Club for Growth, and the Koch network which are bastions of libertarianism. Of course, nobody wants to pay more, so it’s easy to buy into the pledge if you don’t think about the real consequences. Hence, Norquist’s political brilliance. I can’t say as much for the party’s elite, big donors and elected officials. Fiscal cynicism. intellectual insolvency, or something along those lines.

Starting in the 1990s, virtually all Republican general election candidates for the legislature (i.e., ones who survived the primary) signed the pledge. I could not find up-to-date data for that. ATR used to maintain a database of state legislators who signed the pledge. On its current website, I could only find databases for members of Congress and governors. No matter, it is widely recognized as a core principle, probably the core fiscal principle, of the GOP. Those who don’t sign typically act as if they had.

The gas tax and the pledge. Over the decades there was a sort of uneasy bipartisan, grudging acceptance of the gas tax that made dedicated funding work. Both parties recognized the need for ongoing and adequate support for the public road network. Democrats generally do not like the gas tax because it is regressive (typically their be-all-and-end-all tax policy principle) but accepted it because it was user based and Republicans would agree to it. Republicans accepted the need to increase the gas tax rate as a necessary evil because of the constitutionally mandated dedicated funding model. That uneasy bipartisan pattern can be seen in the table above documenting consistent rate increases over the years, almost always with some Republican support. Often, the GOP had trifecta control of Minnesota state government (for 4 out of the first 5 increases).

Republicans buying into the Norquist tax pledge broke that uneasy bipartisan alliance and put us in the soup we’re now in. The initial response, when Republicans controlled the governorship and the House, was to divert general fund money to highways and roads. That was done via the sales tax on motor vehicle constitutional amendment in 2006.

That diversion was not enough; general fund resources were extraordinarily tight with the slow recovery from the 2002 recession. That made finding new money, not just taking from the general fund, fiscally necessary and led to the one gas tax in the pledge era in 2008. That tax increase illustrates the difficulty of enacting increases to even partially offset inflation. It seems unlikely to be repeated unless something changes politically. Prospects for that do not look good.

In the 2008 session, Democrats had substantial, but not veto proof, majorities in both houses of the legislature. But Governor Pawlenty was a tax pledger and was plotting a presidential run. That meant a veto override was necessary. Highway advocates convinced 8 Republican legislators to buck the pledge and their governor, overriding his veto. MPR story. After the 2008 election, only one of them was reelected.  The others either declined to run or lost in 2010, along with many DFLers who voted for the increase. That makes the likelihood of getting even a few Republicans to support a gas tax increase dismal. It was a nonstarter in 2019 with the GOP-controlled Senate. Impossible when the general fund is flush.

Most Democrats, as noted above, do not like the gas tax because it is regressive and they also know it is unpopular, especially with swing voters who they depend upon for their legislative majorities. The public is very sensitive to gas prices. They’re plastered on big signs on every gas station and there is no easy substitute for buying gas if you want to get to work, shop, go to school, etc. Furthermore, few connect paying higher prices via the gas tax with road quality. That makes Democrats unlikely to go it alone in passing gas tax increases. Even if they accept the compelling policy behind gas tax road funding, it will take immense political courage (kamikaze level for some) to do so. Republican candidates running against them in swing districts will relentlessly hammer them for doing it. Especially hard when the news is full of headlines about big budget surpluses. Hence, the reason why they are twisting themselves into pretzels, as Rep. Elkins describes it, to find other, more problematic, sources of funding. A fine mess you’ve gotten us into, Grover.

Two final political observations

Partisan geographic alignment compounds the problem. The GOP’s total dominance of rural and most exurban districts – where the burden of the gas tax is high because geography compels people to drive more (typically in less fuel-efficient vehicles) and general fund taxes are lower because their incomes are below average – will cause them to double down on opposing the tax, even beyond their baseline tax aversion.  It’s in their prime constituency’s narrow financial interests to seek general fund subsidies not gas tax increases.

To be more specific, the gas tax is one of the few state taxes that bears more heavily on rural Minnesota taxpayers compared with their metropolitan area counterparts. It is worth noting, though, that Greater Minnesota still has a net positive balance of payments (positive spending net of gas tax paid of more than 10 percentage points) for its gas tax payments. The details, per House Research, are shown in the table. The spending is from state highway aid to cities and counties. The pattern of direct state highway spending by MNDOT on state trunk highways shows a similar pattern favoring Greater Minnesota. What the table makes obvious is that diverting more general fund revenues, such as sales or income taxes, would benefit rural Minnesota compared to a gas tax increase.

Tax or aid program	Greater MN %
Gas tax	52.5%
Income tax	30.5%
Sales tax	34.5%
State highway aid to local gov’ts (spending of gas tax and other HUDT revenues)	64.5%

That fiscal pattern likely reinforces political instincts. I am not saying that these spreadsheet calculations of geographic winners and losers drive legislative policy decisions. They don’t. But they’re the background music for the Greek Chorus of rural Republicans chanting opposition to gas tax increases. Meanwhile, DFLers need a few rural and exurban districts to maintain any hope of legislative control. This makes them reluctant to support the necessary rate increases for fear of forfeiting any chance of winning those districts.

Minnesota’s purple political complexion makes this worse. A recent New Republic article, The Right-Wing Zealot Who Wrecked the Budget Process and Made Washington Dysfunctional (3/13/23), argues that the pledge is not a factor at the state level:

You will sometimes see a Washington journalist write a lazy sentence like, “Norquist has a similar stranglehold over most state legislatures.” But this is not remotely true.

The Right-Wing Zealot Who Wrecked the Budget Process and Made Washington Dysfunctional, New Republic (3/13/23).

His main evidence for that is that 47 states have raised (hold your breath) the gas tax over the last 30 years, i.e., during the pledge period. That includes Minnesota’s 2008 increase, which it is hard for me to imagine being repeated any time soon. He makes the leap from those 47 increases to make this assertion:

Why do these state legislators have such an apparently different view of the pledge from Washington counterparts? Because they live in the real world. They have to balance budgets, so they know that sometimes you have to increase a tax. It’s only in the fantasyland of Washington that Republicans can be so insanely irresponsible.

The Right-Wing Zealot Who Wrecked the Budget Process and Made Washington Dysfunctional, New Republic (3/13/23).

That, of course, does not square with my observations on the ground in Minnesota. So, I checked to see which states in the last decade or so have increased their gas taxes. An NCSL publication identified 33 increases from 2013 to 2021. Almost all of these were made in states that are either reliably red or blue where the consequences of doing so did not mean losing partisan control of state government. Only four of the states with increases are, like Minnesota, essentially purple with partisan control regularly up for grabs: Colorado, Michigan (reversed by voters which likely sent a strong political message), Pennsylvania, and Virginia. I think that dramatically undercuts the New Republic article’s point and supports mine. Where political survival is not at stake, politicians are more likely to make sensible policy and budget decisions. In purple states like Minnesota, it is much more difficult.

Bottom line: I do not see a path out of this mess. We’re cursed with subpar highways and roads, along with more carbon emissions. More general revenues, such as local sales and property taxes and state sales taxes, will go to pay for roads, while the state also patches gaps in funding with duct tape and paper clip solutions, like delivery fees.

Addendum: St. Paul’s situation

I live in St. Paul and drive and bike on its streets and so recognize the need for consistent, increased spending for street improvements. If the sales tax authorization survives the legislative gauntlet, I will probably grudgingly vote for it as a second or third best solution to a real problem.

Pledge a problem. As I argued above, the state’s failure to index or regularly raise the gas tax rate is partially culpable in the city’s deferred maintenance. I didn’t calculate how much more municipal state street aid the city would have gotten if the 1988 gas tax rate had been indexed. Aid to all cities would have been at least $500 million higher over 30+ year period. St. Paul’s share would have paid for a lot of street improvements.

The city’s failure to use its own funds is obviously a big part of the equation and the tax pledge played into that. Two mayors, Norm Coleman and Randy Kelly, refused to propose increases in the property tax levy, which resulted in deferred street maintenance. Coleman’s aspirations for statewide office as a Republican guaranteed his hewing to the pledge, of course. So, there is blame to go around with the pledge a central player at both the state and city levels.

LGA not the answer. City officials and others who blame inadequate funding of LGA get it wrong. If the state wants to help cities spend more on roads, it should be done through the highway funds and municipal state street aid, not LGA which is general purpose aid. (That would be yet another diversion of general revenues to roads.)

There also is a touch of cherry picking in their claims that LGA is underfunded. The advocates typically choose 2002 as their benchmark. That high water LGA mark reflects a large dollop of LGA sugar to help the 2001 property tax restructuring medicine go down the legislative gullet, not a considered judgment about the appropriate level of LGA. LGA was typically the go-to mechanism to fine-tune property tax restructurings and get them across the finish line. That was certainly the case in 2001 because the LGA increase (1) bought the support of the Coalition of Greater Minnesota Cities and key votes of rural legislators and (2) achieved the desired property tax burdens by small geographic areas on computer runs at the least state aid cost (compared with increasing county or school aid).

The Ladd Study and other neutral observers have concluded LGA is funded above the level necessary to ensure adequate municipal services. Moreover, in the state-local fiscal relationship, education and county (health, welfare, and social services) services have much higher priority in my book than municipal/city services. If anything, county aid is underfunded and city aid overfunded to my lights. Tolerance of choice and significant variation in the levels of municipal services is okay, unlike disparities in education, health, and welfare. LGA funding is neither the problem nor the solution.