For the first time since the onset of the Great Recession, an issue other than jobs and the economy tops Michigan voters’ list of policy priorities. That issue? Roads, according to a May 2014 EPIC-MRA poll (Egan, 2014). Michigan’s deteriorating roads are more than a mere nuisance: Crumbling pavement and deficient bridges jeopardize the safety of motorists, cost drivers hundreds of dollars in vehicle repairs every year, and threaten Michigan’s transportation-dependent economy. Moreover, the Michigan Department of Transportation and other industry groups emphasize that rehabilitating or reconstructing roads only when they become virtually impassible is fiscally reckless compared to regular maintenance (known as “pavement preservation”). The latter requires a continuous funding stream but costs far less in the long run.
The following figures should be a source of apprehension for every driver in the state: Michigan—home of both the Motor City and Vehicle City—ranks dead last in per capita road funding. In fact, neighboring Ohio spends $1 billion more than Michigan on roads every year with fewer lane miles of pavement. According to MDOT, 32% of Michigan’s roads are in poor condition, and that number jumps to 65% by 2018 if funding levels do not increase. MDOT estimates that poor road conditions cost Michigan residents $11.6 billion per year ($3,014 per driver) in lost time, wasted fuel, and crashes, plus an additional $370 per year per driver in vehicle repairs (MDOT, 2013).
Beyond the potential for direct physical and economic harm to citizens, advocates for increased funding argue that inaction is fiscally irresponsible and costs taxpayers billions of dollars in avoidable future road repairs. In fact, MDOT estimates that spending one dollar on pavement preservation when roads are at 75% operating life prevents spending $6 to $14 on rehabilitation or reconstruction when lifespan drops below that level. Moreover, the Department estimates that every additional dollar spent on roads will generate two additional dollars of gross state product and increase real personal income substantially (MDOT, 2013). This amounts to money left on the table as Michigan continues its painfully slow economic recovery.
In January 2013, Governor Snyder requested $1.2 billion in new road funding annually for 10 years beginning in FY2014. The Governor’s figure was based on MDOT estimates for restoring pavement conditions to 90% by 2024 (MDOT, 2013). Instead, the legislature approved two one-time funding increases for FY2014 totaling approximately $450 million. One-quarter of that figure is expressly devoted to compensating MDOT and localities for unforeseen maintenance expenditures resulting from an unusually harsh 2013-14 winter. Because of the legislature’s failure to appropriate adequate funds in FY2014, current estimates now peg the additional revenue needed to bring Michigan’s roads in line with national standards at $1.4 billion to $2.2 billion per year for 10 years (Olson, 2014).
We’ve Been Down this Road
Michigan has confronted this dilemma before. In the late 1990s Michigan’s roads and bridges were among the worst in the nation. In fact, the state’s National Highway System bridges were ranked 49th out of 50 for structural integrity with over 26% classified as structurally deficient (2.5 times the national average) (MDOT, 2013). Like many other states Michigan had prioritized new highway construction over maintenance of existing assets during the final decades of the 20th century. Consequently, roads were left to deteriorate to the point of needing major rehabilitation or replacement.
Recognizing the need for a major change, MDOT adopted the practice known as Transportation Asset Management which involves taking a proactive “lifecycle approach” to road maintenance to ensure long-term sustainability. Specifically, TAM centers on continuous pavement monitoring and the application of low-cost preventative treatments. This new focus on preservation won MDOT accolades from the National Academy of Sciences and The National Cooperative Highway Research Program for best practices in highway management (MDOT, 2013).
Increased road funding was crucial to the success of MDOT’s new management approach, and in 1997 the legislature answered with a 4-cent per gallon increase in the gasoline tax. The raise proved inadequate, however, and by the early 2000s MDOT was forced to borrow heavily to sustain the progress it had made. By 2007 bridge and pavement conditions were vastly improved from a decade earlier, yet the debt incurred by MDOT over this period left it “unable to undertake substantial additional borrowing” by 2012 (MDOT, 2013).
Spinning Our Wheels
Times have changed yet the causes of Michigan’s perpetual road funding crisis have remained the same. Despite having “one of the nation’s highest effective tax rates on fuel,” much of the tax collected on each gallon is not devoted to transportation funding. Of the three separate taxes levied on fuel in Michigan, only the state fuel tax (19 cents per gallon on gas and 15 cents on diesel) and federal fuel tax (18 cents per gallon on gas and 24 cents on diesel) are expressly earmarked for roads.
Michigan also levies its full 6% sales tax on fuel, but nearly all of this revenue is constitutionally earmarked for schools and state-local revenue sharing. Herein lays the crux of the political problem: More than 1/3 of the tax drivers pay on each gallon of fuel—nearly 24 cents at current prices—does not pay for the roads that they drive on (Oosting, 2014). In fact, Michigan currently has the sixth highest tax rate on fuel but ranks dead last in dollars spent per lane mile of road (Egan, 2014).
If we exclude federal fuel taxes and the state sales tax, Michigan actually has one of the nation’s lowest state-levied fuel tax rates. As of January 2013, the national average gasoline and diesel taxes were 22.38 and 24.69 cents per gallon, respectively (Federation of Tax Administrators, 2013). As noted above, Michigan’s gas tax was last raised in 1997, from 15-cents to 19-cents per gallon. The diesel tax has remained at 15-cents per gallon since 1980 (only 1/5 of states levy a smaller tax on diesel, the fuel used by most commercial trucks, than on gasoline).
These stagnating tax rates are problematic for two reasons: First, because the current fuel taxes are levied on a per-unit basis and do not increase automatically with either the price of fuel or inflation, they fund a decreasing amount of construction and maintenance costs as prices rise over time. Second, the development of more fuel efficient (and electric) vehicles has led to a net reduction in fuel consumption even as the total number of vehicles on the road continues to increase. This trend has precipitated an erosion of the fuel tax base that is expected to continue as tougher federal fuel economy standards are phased in. Consequently, the state is collecting less fuel tax revenue than it did a decade ago—even in nominal terms.
Fueling the Solution
Despite political misgivings, it seems likely that a fuel tax increase will be necessary. According to an MDOT analysis, had fuel taxes been raised by nine cents per gallon instead of four in 1997, the department would have been able to meet its bridge and pavement condition targets through 2007 without borrowing. A fourteen cent per gallon increase would have accomplished this through 2012. If the legislature had simply increased the diesel tax to parity with the gasoline tax, MDOT would have come very close to meeting its 2007 condition goals without borrowing (MDOT, 2013).
There is widespread support for such an increase from a surprisingly diverse group of stakeholders. First, the Governor’s proposal mentioned above would be funded in part by transitioning to a percentage-based wholesale tax on both gas and diesel that is equivalent to about 33-cents per gallon at current prices (Oosting, 2013). The Michigan Chamber of Commerce, a group staunchly opposed to nearly every tax hike, supports a gas tax increase of 25 cents per gallon over four years (Egan, 2014). The County Road Association of Michigan (CRAM) advocates specifically for an increase in the diesel tax in its “2014-15 Legislative Priorities” report. Similarly, Michigan State University economist Charles Ballard argues that “Michigan should raise the tax rate on diesel fuel at least to parity with the gasoline tax” (Ballard, 2010).
While the fuel tax is widely considered by economists and policymakers as a relatively good proxy for a “road user’s fee,” others are opposed to any tax that would increase prices at the pump. A recent poll shows that 68% of Michigan voters are “willing to pay at least an additional $10 a month in taxes” to fix the state’s crumbling roads, but they do not favor raising fuel taxes to do so (Egan, 2014). Instead, voters prefer a 1% increase in the sales tax if the additional revenue is earmarked for roads. Other popular options include reallocating existing revenues and increasing fees and regulations on heavy trucks which many drivers believe are “causing the most damage” (toll roads and mileage-based user fees are non-starters with the public) (Egan, 2014).
In a sentiment echoed by many voters, Democratic lawmakers contend that fuel taxes are regressive and raising them would disproportionately affect lower income residents. Lawmakers from border districts worry that their constituents would simply cross into Ohio or Indiana to buy fuel if taxes increased significantly. Anti-tax groups reject increases outright saying that “better techniques and supervision of contractors, not more money, are what’s needed” and that the state should start by auditing contractors before appropriating additional funds (Egan, 2014).
The other major barrier to action is the treatment of trucks. In addition to higher taxes on diesel fuel (which the trucking industry opposes for obvious reasons) the truck debate centers on commercial permit fees and weight limits. As noted above, there is a widespread belief among voters that heavy commercial trucks inflict more damage on roads than do cars. Not surprisingly, the trucking industry and business groups contest that assertion. It is true that Michigan’s 164,000-pound weight limit on trucks is the nation’s highest, yet that weight must be distributed over 11 axles. Studies examining the adequacy of that additional weight distribution have been inconclusive. Adequate or not, industry representatives worry that higher permit fees or lower weight limits will “increase costs and congestion by splitting loads among more trucks without significantly reducing stress on the roads” (Egan, 2014).
Despite concerns about each, nearly every piece of legislation currently on the table includes both a fuel tax hike and higher fees on commercial trucks.
Are We There Yet?
When the Governor’s $1.3 billion road funding proposal was announced in early 2013, Senate Majority Leader Randy Richardville spoke for a majority of his caucus when he called the fuel tax and registration fee increases “a real problem” for Republican lawmakers (Oosting, 2013). A little more than one year later Richardville is leading the charge for a fuel tax hike.
In May, the House passed a series of bills that would have raised about $450 million per year in additional road revenue by transitioning to a percentage based fuel tax and redirecting a portion of sales and use tax revenue not earmarked for other purposes (Egan, 2014). Not to be outdone, Richardville scrapped the House plan and aimed for a much higher annual increase of $1.4 billion with a package of bills introduced in June. Richardville’s proposal would be funded primarily by a wholesale tax on gas and diesel that starts at 7% and increases to 15% by 2019. Despite winning over a majority of Democratic senators with a partial restoration of the Homestead Property Tax Credit that was reduced in 2011, the proposal was voted down 17-21 thanks to a recalcitrant Republican majority dead set against raising taxes. Indeed, it is estimated that the proposal would have increased the gas tax to nearly 40 cents per gallon when fully implemented (MIRS, 2014).
After Richardville’s big fix was voted down on June 11, several watered down fuel tax increases were rejected on the following day—the last legislative session before summer recess. One of those bills would have increased the 15-cent diesel tax to match the 19-cent gas tax and then indexed both to inflation. It would have generated about $32 million in additional revenue next year and up to $300 million by 2020 as inflation rises. Another would have put a 1% general sales tax increase in front of voters on the August primary ballot. That proposal would have raised an additional $1 billion per year, but lawmakers from both parties raised concerns (shared by economists) about any revenue stream not tied to actual road usage (Oosting, 2014).
In a last ditch effort to get something passed before summer break, the Senate voted on a bill that would have implemented a 6-7% wholesale tax but without any automatic increases. Even this plan—designed to be revenue neutral for the first couple of years thus raising no additional road money—could not pass muster. This time it was the Democrats who blocked passage after the Homestead Credit increase was removed and a proposal for higher fees on overweight trucks was rejected (MIRS, 2014).
While hopes for a major roads bill faltered in the Senate, there was a positive development as debate on the FY2015 state budget concluded. The final $37.5 billion omnibus budget bill, which calls for an 11% increase in state spending over the 2014 document, appropriates an additional $271 million in one-time road funding for 2015 (Oosting, 2014). Of course, that amount represents only a fraction of what’s needed to solve the problem (and a little more than half of the additional funding appropriated for the current fiscal year).
Though the legislature adjourned for summer recess failing once again to make significant progress on a road funding solution, the fact that the marathon road funding sessions took place at all caught many observers by surprise. First, lawmakers showed a willingness to forge a bipartisan compromise in spite of the contentious election year political environment and Republican supermajority in the Senate. Second, legislators from both parties were poised to raise taxes significantly during an election year. It is true that recent polls show widespread popular support for increased road spending, yet Richardville’s plan called for a tax increase unprecedented in Michigan’s recent history. Indeed, Democratic Senate Minority Leader Gretchen Whitmer called it “the largest tax increase many of us will ever vote on in our legislative careers” (Egan, 2014).
Nonetheless, it seems that only tax-averse groups like Americans for Prosperity are applauding the outcome. With the deadline for additional current-year appropriations now passed, the next chance for significant action will likely occur during the lame duck session following the November election. In the meantime, the Senate has convened a Road Funding Workgroup to explore other options. Work groups don’t fix roads, however, and lawmakers are sure to be reminded of that fact as they hit the campaign trail this summer.
Ballard, Charles L. 2010. Michigan's Economic Future: A New Look. East Lansing: Michigan State University Press, 2010.
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