Disagreement on funding for road repairs may bring Michigan budget stalemate

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Michigan's first-year governor, Gretchen Whitmer, is at an impasse with the GOP-controlled legislature about how to raise funds to fix the state’s roads.

Both parties claim to support higher transportation funding but don't agree on how.

The plan Whitmer introduced in March hinged on a 45-cent-per-gallon hike in the fuel tax to raise the extra $2.5 billion the Michigan Department of Transportation said is needed annually for roads. Republican lawmakers have rejected the plan but have not released a funding plan of their own.

Earlier this month the Senate passed its version of the budget without Whitmer’s plan to raise the gas. The plan instead would divert $600 million in state income tax revenue to road repairs in 2020, a year earlier than planned.

That funding, earmarked in 2015 as part of a $1.2 billion road-funding legislative package, would be sped up with the use of $132 million in one-time money, according to the Senate transportation budget adopted on a party-line vote. The Michigan House of Representatives is working on its own version of a budget and the two chambers will have to come to an agreement before anything reaches Whitmer’s desk.

“Our position hasn’t changed and the administration stands behind the recommended budget put forth,” said Whitmer spokesperson Tiffany Brown. Whitmer’s office said the governor will veto the Senate’s roads budget if lawmakers send it to her as written.

Michigan's fiscal year begins on October 1.

“I do agree with the governor that moving forward, finding and setting a priority getting us closer to the $2.5 billion,” said Sen. Jim Stamas, R-Midland. “But until we actually have those revenues I think we have to move forward with a real budget with real revenue.” Stamas is chairman of the Senate Appropriations committee.

A lobbying group representing businesses and Michigan’s municipalities on Tuesday urged lawmakers to work on a bipartisan solution to what it called massive, unmet infrastructure needs.

"Michigan’s infrastructure problem belongs to all of us and our elected leaders in Lansing must work together to fix it,” said Tim Daman, president and CEO, Lansing Regional Chamber of Commerce. “Failing to do so will have dramatic consequences for public health and safety, and our economy. It’s time to take action, our communities and businesses depend on it

Eric Lupher, president of the Citizens Research Council, a not-for-profit public affairs research organization, said that Michigan has fallen far in terms of how much money it raises as a state relative to the wealth of the state.

“We are taxing ourselves less as a percent of personal income,” Lupher said. “Our standing among the states for state revenues per capita has fallen down to 34th from 14th and it is all done in the name of tax competitiveness and economic development, but if you don’t provide services, that is going to force companies to look elsewhere as well. At some point you have to raise taxes to provide government services.”

For 2019, Michigan residents are expected to earn a collective $460.3 billion, according to the U.S. Department of Commerce Bureau of Economic Analysis. That means the state could impose as much as $43.7 billion in taxes or fees on residents and businesses under the state’s Headlee Amendment.

The state is projected to collect $33.4 billion in taxes and fees this year, $10.3 billion below the cap, according to the nonpartisan House and Senate fiscal agencies. The gap is expected to grow to $12.1 billion by 2021 as personal income growth continues to outpace tax and fee revenues. Whitmer’s administration has argued that stagnant state revenues make it nearly impossible to fix Michigan’s crumbling roads without some form of new taxes or fees.

Going to the gas tax is historically how the state has raised funds for infrastructure fixes. According to the state, about one third of such funds have come from gas and diesel fuel user fees, another third from vehicle registration fees, and the final third from federal aid.

Lupher said that the Whitmer plan doesn’t account for diminishing revenues over time.

"Young people are driving less, those that are still driving and investing in vehicles that are more fuel efficient,” he said. “When you look at the gas tax over time especially when you price in inflation it doesn’t result in the revenues necessary to invest long term.”

Policy makers should consider raising revenues from other taxes in combination with gas taxes, Lupher said. “A sales or income tax increase wouldn’t have to be raised to a terribly high rate and a property tax increase would be only for number of mills,” he said. “This combined with gas taxes could create funding to meet the $2.5 billion annually the state requires to fix the roads.”

James Hohman, director of fiscal policy at the Mackinac Center for Public Policy, said the general growth of the state budget matters more. “State taxes are expected to collect around $900 million more for the upcoming fiscal year, and that makes residents skeptical that lawmakers need to raise taxes,” he said.

Hohman said that lawmakers should be especially skeptical about raising $2.5 billion in taxes in order to spend $1.9 billion on roads.

“The state has already doubled the amount of state revenues that it spends on roads over the past nine years, and legislators are finding more dollars in within their existing resources to for this budget priority,” Hohman said. “There is a lot of spending in the state budget that ought to be less of a priority than the roads, and lawmakers ought to consider real cuts. But they’ve found more money in the budget for the roads without much in cuts.”

Whitmer on the campaign trail said that she’d turn to debt financing if the legislature was unwilling to raise taxes.

Lupher said that the debt option is problematic because without new money to pay back principal and interest the state is borrowing from the future. MDOT is still making $160 million in debt service payment annually on State Trunkline Fund bonds it issued two decades ago.

“That is sort of how we got into this mess in the first place; bonds were sold in late 1990’s and early 2000s without any revenue increase so paying back that principal and interest took away from the ability to maintain the roads on ongoing basis,” Lupher said.

“It would have been much more efficient to maintain them than to let them go bad and have to reconstruct them again,” he said.

“The governor ran on more money for the roads and didn’t rule out either finding it in the budget or borrowing,” Hohman said. “But she can’t borrow without legislative support, either.”

Tom Kozlik, Hilltop Securities’ head of municipal strategy and credit, said that another option could be to use private public partnerships. MDOT sold $600 million of private activity bonds as part of a P3 with private developer Oakland Corridor Partners to rebuild part of Interstate 75 in metro Detroit.

“The state P3 arrangements have been used, and used successfully I might add, in the states surrounding and near Michigan so it is not out of the question that these types of options could be considered,” Kozlik said. “But there are critical policy implications with these types of methods that need to be strongly considered by all involved. They could be a compliment in one form or another depending upon what Michigan lawmakers prioritize in their policy and financial analysis.”

Finding funds for roads isn’t just a Michigan problem. Kozlik says that lawmakers throughout the country generally, as in Michigan, are trying to determine an effective and efficient method to fund infrastructure upgrades and maintenance that moves beyond the user-pay model.

“In some cases it is likely that new or increased revenue sources are being considered,” Kozlik said. “This type of spending can have some additive impact to a state economy as far as jobs and economic growth. This is especially true for Michigan as it is an access point for trade with Canada.”

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