ST. PAUL — After Republican lawmakers batted down Gov. Tim Walz’s pitch for a 20-cents-per-gallon gas tax increase last spring, some of the governor’s fellow Democratic policymakers floated a trial balloon to test support for a lower-priced way to pump more money into fixing Minnesota’s aging roads and bridges.

The DFLers are “actively exploring” the addition of a “debt-service surcharge” to the state’s gas tax that would boost the price at the pump a few cents per gallon to cover the cost of borrowing money for highway improvements, said House Transportation Committee Chairman Frank Hornstein, DFL-Minneapolis.

Over the next five years, the Minnesota Department of Transportation will run up against a limit on how much it can borrow — Hornstein called it a “fiscal cliff.” Unless Walz and the Legislature find a way for the department to sell more trunk highway bonds, the limit will “severely constrain our ability to maintain the (road-and-bridge) system … and virtually eliminate the possibility of any expansion,” he said.
Hornstein, state Transportation Commissioner Margaret Anderson Kelliher and House Speaker Melissa Hortman have been quietly bouncing the idea of a debt-service fee off of local government officials and “stakeholder groups that care about transportation,” Hornstein said.
So far, most of the people the DFLers have approached are “intrigued by the idea,” Kelliher said. That includes Walz, who is “aware of what we’re doing” but hasn’t yet embraced the proposal.

Is it a way past gridlock?

Hortman said she first suggested the idea last spring during budget negotiations with Walz and Senate Republican Majority Leader Paul Gazelka. When it became apparent Republicans would not accept the DFL governor’s gas tax proposal, she said, Gazelka expressed interest in considering borrowing more money as an alternative way to finance road projects.
“The idea of increased trunk highway bonding, which has been a Republican approach, and putting that together with a debt-service surcharge, which is a responsible Democratic, pay-as-you-go approach, may be a way for us to get over this gas tax hurdle,” Hortman said.
But Sen. John Jasinski, an assistant Republican majority leader and vice chair of the transportation committee, said GOP lawmakers remain adamantly opposed to anything resembling a gas tax increase.
DFL leaders may call their idea a fee, Jasinski said, “but it’s still a gas tax, and people are saying they don’t want a gas tax increase.”
Lawmakers need to look at all options to provide more highway funding, he said, adding that he is “open to a discussion” on fees.
But he said Republicans favor shifting more money from other state services to transportation and making sure highway funds are not being diverted to non-road uses before they consider raising more revenue.

Seeking common ground

Hornstein said he plans to discuss the fee idea with Senate Transportation Committee Chairman Scott Newman, R-Hutchinson, as soon as they can schedule a meeting.
The three DFL leaders haven’t put a price tag on the fee idea. That would be up to the Legislature and the governor, Hornstein said. “Legislators could put — I hate to use the cliché — ‘guardrails’ on a fee, setting the timing and the amount.”
Imposing a fee of 6 cents per gallon would raise enough money over several years to pay off the principal and interest on the nearly $2 billion highway bonds that MnDOT has sold in the past 10 years, Kelliher said. The additional 6 cents would generate an estimated $192 million a year for roads and bridges, with about $119 million of that going into a state highway fund and the remainder earmarked for local roads.
The fee could increase to as much as 11 cents a gallon to fund an ambitious highway bonding program, Kelliher said, but that increase would drop as the debt was paid down.

Approach tried before

A debt-service surcharge isn’t a new idea. Minnesota motorists are paying such a fee now.
It was part of a 2008 bill that raised the state’s gas tax by 5 cents a gallon and added an extra 3.5-cent debt-service fee, bringing the combined state tax rate to the current 28.5 cents per gallon.
The revenue from that fee was intended to pay off bonds issued to repair or replace the state’s deteriorating bridges after the 2007 collapse of the Interstate 35W bridge over the Mississippi River in Minneapolis.
Kelliher and Hortman were key players in passing that bill. Kelliher was House speaker at the time, and Hortman was the DFL floor leader who devised the strategy for overriding then-Gov. Tim Pawlenty’s veto of the first gas tax increase in 20 years.
This year, the DFL-controlled House passed a 20-cent gas tax increase bill, but the Republican-run Senate rejected that measure.
Hortman said she isn’t giving up on finding more money for transportation projects next year. One option to provide funding is increasing MnDOT’s highway bonding authority.
“If we want them to take out more debt to build more roads, we have to give them more money to pay back the loans,” she said.

Impact on borrowing

In 2010, the Legislature passed a law limiting MnDOT to spending no more than 20 percent of the state’s trunk highway fund revenue on debt. The reason: to prevent spending more money on interest payments than on road maintenance and expansion.
The department’s annual debt service is projected to reach $288 million, or 18 percent of its revenue, by 2025, Kelliher said. “We’re edging ever closer” to falling off the fiscal cliff that Hornstein cited.
Without the ability to borrow more money for roads, she said, MnDOT would be hard pressed to maintain existing state highways, much less to expand the system.
Rather than going deeper in debt, Kelliher and Horenstein said the idea they’re considering would use revenue from the debt-service fee to pay off bonds the state has already issued, freeing up space under the 20-percent limit to borrow more money.
“It’s like when a family has a credit card limit, and they’re running up against it, it’s more fiscally prudent to pay off the debt than to ask the credit card company to raise the limit. Then you’re in deeper debt,” Hornstein said.
Using a debt-service fee to pay off highway bonds would provide “more of a pay-as-you-go mechanism,” Kelliher said.

The 2020 legislative session is a logical time to pass such a reform, she said. Lawmakers traditionally focus on balancing the state’s two-year general fund budgets in odd-numbered years, such as this one, and approve borrowing money for public works projects in even-numbered or “bonding years.”
While lawmakers are reluctant to raise taxes for anything, Kelliher said, “there’s quite a love for trunk highway bonds.” In 2017 and 2018, when Republicans were in charge of both houses, the Legislature approved $1.4 billion in highway bonds, which are repaid with gas taxes, license tab fees and other dedicated revenue sources.
Although a debt-service fee would provide more money for roads and bridges, it wouldn’t be enough to meet all the state’s transportation needs. “This would be a very partial fix,” Hornstein said.
MnDOT estimates it will need $44 billion over the next 20 years to meet the state’s road and bridge needs while it’s projected to collect $24 billion from current revenue sources, leaving a $20 billion gap.