Regional News

Low on Fuel in Michigan

CHICAGO - Michigan lawmakers are expected to tackle the issue of transportation funding in their upcoming lame-duck session, mulling a slew of new revenue options ranging from reconfiguring the state's gas tax and implementing tolls on major highways to hiking the sales tax.

The hearings, scheduled for early December when legislators return from their annual two-week deer-hunting break, were prompted by a report released last week by a governor-appointed task force. The report warned that Michigan must at least double its transportation funding - from new revenue sources - or face serious deterioration in its infrastructure.

The problem comes after years of "historic underinvestment," according to "Transportation Solutions: A Report on Michigan's Transportation Needs and Funding Alternatives." For the past several years, the state has issued bonds to enhance its spending on transportation and as a result is now bumping up against its borrowing ceiling. That rules out additional bonding to supply funds, according to the report.

Like other states and the federal government, Michigan has suffered a decline in transportation-related tax revenues over the last few years as demand has dropped in the face of rising oil prices and the emergence of alternative-fuel cars. The decline has exposed the vulnerability in relying on gas and diesel taxes for revenue, and requires that the state find more stable sources of revenue, transportation experts said.

Without pumping new revenue into the system, the state stands to lose up to $1 billion in annual federal matching funds starting next year, according to the report. Up to 30% of the state's roads will fall into poor or fair condition over the next decade, the aviation system will deteriorate, and existing local public transportation services will likely be cut, the task force warned.

And as the state saw its first snowfall Monday - up to nine inches in some counties - the Michigan Department of Transportation and local governments warned residents that the cash-strapped agencies would have to cut back on plowing and salt trucks this year.

"This is a very serious problem that we need to address sooner or later," said Rich Studley, president and chief executive officer of the Michigan Chamber of Commerce and the task force's co-chairman. "If there's no action during the lame-duck session, the problem will only get worse. There's substantial need for additional funding, and we're hopeful that something will happen early next year. The pressure is building."

The state currently spends $3.2 billion a year on the system, and needs to increase that funding to at least $6.1 billion, said the 13-member task force, which Gov. Jennifer Granholm created last year and charged with coming up with alternative revenue sources for Michigan's transportation system.

Taking on additional debt to finance capital improvements is out of the question, the task force said. MDOT currently pays about $200 million annually in debt service, nearing the maximum approved by the State Transportation Commission, according to the report.

In the 1990s, MDOT's debt was around $650 million, and since then has increased to more than $2 billion, the report said. The Build Michigan I, II, and III programs ended in recent years, and the Jobs Today program will end this year.

While the task force recommends curtailing borrowing over the near term, it encourages refinancing for possible savings. Since 2004, MDOT has refinanced four bond issues, saving about $20 million, the report said.

"The department deserves a lot of credit for managing that [debt] and refinancing when appropriate, but at some point we need to start paying the bills," Studley said. "After the Build Michigan I, II, and III programs, the feeling is, enough is enough."

The Republican-controlled Senate has scheduled a Dec. 2 hearing on the report. Sen. Judson Gilbert, the GOP chair of the Senate Transportation Committee, is also a member of the transportation task force. He has asked members of the Senate Appropriation Committee to join the hearings, according to Keith Ledbetter, director of legislative affairs with the Michigan Infrastructure and Transportation Association and a member of an advisory committee to the task force. The Democratic-controlled House has not yet scheduled a hearing but is expected to do so, Ledbetter said.

"They're teeing this issue up," he said. "The goal is $3 billion a year, and there's no way politically you can raise that type of money. We're not asking the Legislature for the entire $3 billion - the federal government will be part of it, and we'll give local units of government some different funding options. We're asking the Legislature for around $1 billion to $2 billion."

Among the top proposals lawmakers are likely to consider is a reconfiguration of the state's gas tax, giving local governments the option to impose their own taxes to raise revenue, and raising various vehicle registration fees.

In the light of declining gas tax revenue, vehicle registration fees have become an increasingly important revenue source. The task force predicts that revenue from vehicle registration taxes is expected to surpass fuel tax revenues by 2012.

Michigan's fuel tax - 19 cents on the gallon for gas and 15 cents on the gallon for diesel and propane - represents about a third of the general transportation fund. Another third comes from vehicle registration fees and the final third from federal aid.

Consumers also pay a 6% sales tax on gasoline purchases - Michigan is one of only a handful of states that charges sales tax on gas purchases - though very little of that money goes into the fund.

The task force has recommended that lawmakers consider replacing the per-gallon gasoline tax with a tax based on a percentage of sales prices. The move would help stabilize gas tax revenue and allow the state to benefit from rising oil prices, Studley said.

Implementing tolling on major highways is another possibility. Currently, Michigan has only a few tolls for some of its major bridges and border crossings. Additional tolling would allow the state to finance badly needed capital projects for its freeways and intercity streets, projects that each could cost over $1 billion, according to the report. Tolling would have the additional benefit of "pricing traffic jams out of existence by offering discounted travel in off-peak hours," according to the report.

But lawmakers would have to amend the Michigan highway laws to allow for tolling. And the state would need to apply for and win a waiver from the federal government, which currently prohibits tolling on roads that have been paid for with federal dollars.

Nearly all of Michigan's roads have used federal dollars. The task force is hopeful, however, as the U.S. Department of Transportation has already encouraged Michigan to apply for its waiver program, Studley said.

Legislation allowing tolling would likely be packaged with a series of other measures designed to give the state more options, he added.

"The idea is to seek a broad directive to be able to pursue public-private partnerships and seek whatever waivers and pilot projects might be available," Studley said.

Meanwhile, another series of bills was recently introduced in the House that would give local counties the option of imposing new taxes and fees. Under the measure, counties could impose their own gas tax as well as fees for operators' licenses, vehicle registration, and real estate transfers. The bill would also allow counties to set a 1% county-wide sales tax.

The task force also recommended an option sure to be less politically popular, and one that would require voter approval: raising the state's sales tax to 7% from 6% and earmarking the additional money for transportation projects. An additional 1% sales tax increase would generate $1.3 billion annually and could even come to replace the fuel tax, Ledbetter said.

The sales tax proposal could act as a backup plan for the state, as residents could vote on whether to replace the Legislature's proposals with the sales tax increase, he said.

As proponents of the plan begin to lobby lawmakers on new funding proposals, at least one obstacle remains - nearly half of the members of the House are newly elected this year, and "don't know a thing about how transportation is funded," Ledbetter said. If the House waits until January to act, the issue could be delayed six months as members organize committee assignments, he said.

On the Senate side, while none of the senators were up for re-election this year, they all face re-election in two years. At that point, the state's fairly new term-limits law will mean that 30 of the state's 38 senators cannot run for re-election.



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