The Gas Tax, the Infrastructure Bank, and Lawmakers’ Word Games

• Legislature began diverting fees to Infrastructure Bank in 2005
• Diversion of Funds meant to circumvent state constitution
• In 2003 lawmakers changed the name of the gas tax to a ‘fee’
• After credit downgrade, legislature continued to divert funds to STIB

(The following provides historical background for this analysis of H.3516, the gas tax bill. That bill was signed into law on May 10, 2017 when the state senate overrode the governor’s veto.)

In 2005, the South Carolina General Assembly began creating new funding sources for the State Transportation Infrastructure Bank through Act 176. That law diverted revenue from fines and fees related to licensing, motor vehicle registration fees, the gas tax (motor fuel user fee), and other sources from the General Fund to the State Non-Federal Aid Highway Fund. The act also required that all electric power tax revenue in excess of $20 million be credited to the Department of Transportation, which would then “annually distribute fifty percent of the excess to the State Non-Federal Aid Highway Fund; and make an annual contribution from nonstate tax sources [i.e. revenue derived from fees] in an amount equivalent to fifty percent of the excess to the State Highway Account of the South Carolina State Transportation Infrastructure Bank.”

Setting up these revenue streams to be diverted to the State Non-Federal Aid Highway Fund was critical for the State Transportation Infrastructure Bank. As cited in a 2010 Moody’s Investors Service rating report, these funding sources were pledged toward the debt service of STIB revenue bonds. This was the start of a clear end run around Article X Section 13(9) of the South Carolina constitution, which permits the legislature to incur debt from revenue bonds but explicitly prohibits that debt from being repaid by revenues from any tax.

Despite this maneuver, however, the STIB’s new resources were hit fairly hard by the 2007 recession, causing a decrease in revenue streams pledged to cover the STIB debt. This led Moody’s to downgrade the STIB’s credit rating to A1 from Aa3 in 2010. (Aaa is the best possible rating, with Aa3 being in the second best category of ratings, and A1 slipping into the third category.)

The above bill was vetoed by Governor Sanford, citing an estimated loss of $85 million to the General fund and to the credit of the Department of Transportation. That veto was overridden in the House 101-3, and 36-7 in the Senate. But a large portion of that money was not retained by DOT. It was instead transferred to funds that were then routed to the STIB.

Of equal importance is Act 69 of 2003. In this omnibus bill, the legislature directed the Code Commissioner “to make the following changes in Title 12, Chapter 28: In all instances, substitute ‘user fee’ for ‘tax’ and ‘motor fuel subject to the user fee’ for ‘taxable motor fuel.’” This change allowed gas tax revenue to be pledged to STIB debt as well. According to the same 2010 Moody’s report, an amount equal to one cent of the gas tax that is contributed from DOT to STIB generated $25.7 million of pledged revenue for the STIB in FY 2010.

It should be clear that the gas tax is not a fee, since gasoline is not a service provided by government but rather a privately distributed product. In fact, a 2015 opinion by Attorney General Wilson stated that the South Carolina Supreme Court has “defined a ‘tax’ as ‘[a]ny governmental charge imposed for the purpose of raising revenue … regardless of the name by which it is called.’” That opinion went on to say that despite the legislature directing the Code Commissioner to replace “tax” with “user fee,” “our Supreme Court has recognized, the label given to a charge does not control.” It doesn’t matter what it’s called, in other words. It’s a tax. And since the legislature is raising revenue from the tax imposed on gasoline, it would seem that any diversion of those funds to be used as revenue bond debt service coverage would be unconstitutional.

Despite generous cash infusions to the STIB over the years, including Act 275 last year, which established a permanent transfer of several revenue streams (including DMV fees) to be made available for bonding in the amount of $200 million, the STIB bond rating remains at A1 according to Moody’s. As of 2015, the bond rating service was still pointing to a “pledged revenue base that was eroded” by the recession as a rationale for the credit rating. Hence the need to raise the amount of pledged revenue sources to the STIB. Legislative leaders need the Bank to have a better rating.

Steps taken in the bill to assist the STIB

H.3516 creates the new Infrastructure Maintenance Trust Fund, to be funded in part by the tax and fee increases in the bill, and specifies that the fund “must be used exclusively for the repairs, maintenance, and improvements to the existing transportation system.” However, the fund was added to an existing law that allows the DOT commission to commit funds from the State Highway Fund, the State Non-Federal Aid Highway Fund, and now the Infrastructure Maintenance Trust Fund to a special fund known as the State Highway Construction Debt Service Fund. The purpose of this special fund is to pay “the principal and interest, as it comes due, on bonds issued for the construction or maintenance of state highways, or both.” The Infrastructure Maintenance Trust Fund appears to have been set up, therefore, as yet another dedicated revenue stream for STIB bonding capacity.

As if to erase any doubt that the bill has everything to do with propping up the STIB and little to do with fixing the state’s roads, consider the following statement found in the House version of the gas tax increase: “Notwithstanding any other provision of law requiring the Department of Transportation to transfer revenues to another entity, if the department determines that the transfer of funds is not prudent and the transfer would not best serve the transportation infrastructure needs of this State, then the department may delay the transfer indefinitely. However, the transfer may not be delayed if the funds are to be used to pay debt service on outstanding bond issuances.” In essence, everything is subject to a delay in funding except debt service on bonds.

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