Wednesday, February 8, 2012

T-SPLOST: Financing Georgia’s Transportation Projects and Ricardian Equivalence

During the summer of 2010, the state of Georgia passed a plan to invest in its transportation network. The interesting feature to me was how they proposed to pay for this construction as well as the arguments for the proposal put forth by Doug Callaway:

If voters approve a new one-cent sales tax for transportation projects, it could be one of the greatest economic tools in Georgia, according to an official pitching the benefits of the proposal. “This is the best option on the table. Is it perfect? No. Is it the best thing going? Absolutely,” said Doug Callaway, executive director of the Georgia Transportation Alliance — a nonprofit group affiliated with the Georgia Chamber of Commerce. Come July 31, voters in 12 districts throughout the state will be asked to consider a 10-year, one-cent sales tax that will fund transportation projects in their region … Callaway outlined the key points of the T-SPLOST that voters will likely hear until they head to the polls this summer: More jobs, safer roads and revenue that stays in the region. “We’ve got high unemployment, let’s be honest, and little hope for an immediate turnaround,” Callaway said, while pointing to University of Georgia experts who estimate that the economy won’t improve until 2020.Those regions that approve the T-SPLOST stand to possibly create more immediate and long-term jobs — while recovering more quickly from the economic downturn, he explained.

T-SPLOST stands for the Transportation Special Local Option Sales Tax. If a county decides to increase its sales tax by 1% for each of the next 10 years, then construction on new transportation projects can begin. Mr. Callaway is justifying this proposal on Keynesian grounds. While I hope Georgia’s economy can recovery before 2020, we have to admit the current recovery is going slowly.
Not to dust off an old debate, but let’s recall what Robert Lucas once argued:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that.

Several economists challenged Dr. Lucas including this from Simon Wren-Lewis:

If you spend X at time t to build a bridge, aggregate demand increases by X at time t. If you raise taxes by X at time t, consumers will smooth this effect over time, so their spending at time t will fall by much less than X. Put the two together and aggregate demand rises.

If Mr. Callaway has his way, maybe we can have an empirical test along the lines that Christina Romer talked about!

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