News Story

How the Michigan House Pays For Roads

Spending limitations, but no cuts

For the second time this year, the Michigan House has passed a package of bills that provides more than $1 billion in additional funding for road repairs, and does so with fewer tax hikes than preferred by Gov. Rick Snyder and the state Senate. Contrary to some news accounts, it includes no spending cuts.

The bills do include $600 million in fuel and vehicle registration tax hikes, which are partially offset by changes to an income tax credit that will save middle-income homeowners and renters around $200 million a year.

The rest of the $1.2 billion road funding plan relies on eventually earmarking $600 million of the state’s growing revenue collections to road repairs. Starting in October 2018, $150 million from state income tax receipts would go to road repairs, then $325 million the following year and $600 million in the 2020-2021 fiscal year.

“This is a very fair, bipartisan plan that takes the Senate and the governor's chief concerns into account,” said Gideon D'Assandro, spokesman for House Speaker Kevin Cotter, R- Mt Pleasant. “This is the compromise plan that can get support statewide and finally fix our crumbling roads and bridges.”

Some proponents of higher spending in other areas of the budget have characterized this revenue reprioritization as cuts, but that is speculation, and not supported by recent state revenue trends. James Hohman, the assistant director of fiscal policy with the Mackinac Center for Public Policy, says it is far more likely that the earmarks represent a reduction in the rate of growth for some programs, not a cut. 

“This plan has been described as ‘shifting $600 million in existing state dollars to roads,’ which implies that there will be $600 million in cuts to the state budget. But that is not what legislators did,” Hohman said. “They dedicated $600 million from an income tax revenue stream that keeps growing. This will allow legislators to continue to devote more money to the roads while also increasing spending elsewhere.”

Hohman also noted that $400 million from the state’s General Fund is already being earmarked to road repairs, but on just a year-to-year basis. He said placing a permanent $600 million earmark in statute would presumably free up that $400 million, meaning the package passed this week might only redirect an additional $200 million more to roads from current revenue streams, not $600 million more.

Republicans provided most of the votes, in a House session that went until nearly 10 p.m. Wednesday. This is not necessarily an indication that the plan will eventually be enacted, though, given that Snyder and Senate Republicans have consistently favored a road fix that relies more heavily on tax increases (euphemistically dubbed “new revenue” inside the Lansing beltway).

In June, the House passed another road funding plan that relied even less on tax hikes. It also made a cut to corporate welfare and to a state earned income tax credit program that delivers subsidies to low-income workers. The Senate responded in July with a road repair plan that would impose $1.4 billion in tax hikes, with no cuts to other government spending.

Before this week’s action, House members were being pressured to punt the chambers' differences to a House-Senate conference committee, where a handful of lawmakers would cast their preferred road fix mix into statutory language and then drop it before the full bodies for a take-it-or-leave-it vote.

That preferred plan would probably be the one that relies on an $800 million tax hike and diverting just $400 million from rapidly rising state revenue. On Monday, Senate Majority Leader Arlan Meekhof, R-West Olive, called on the House to send the “$800-$400” plan to the conference committee process.

Pressure was also being applied by Business Leaders for Michigan, which is comprised of senior executives at universities and large Michigan companies who prefer proposals that would impose steeper tax hikes on motorists. The business group was joined by the Michigan Municipal League, an organization that lobbies for local governments, in a media blitz promoting the $800-$400 concept.

That bandwagon came to a halt with the decision by House Republicans to pass the $600-$600 plan, which was promptly condemned by the two organizations. In contrast, the Michigan Chamber of Commerce and the West Michigan Policy Council praised the House action.

Mackinac Center for Public Policy President Joseph Lehman is not thrilled with the package but likes the direction it takes. "It's not ideal because it hikes taxes, but only half the money comes from new taxes,” he said. “A step in the right direction is better than paralysis. We will continue to identify low-priority state spending that could be devoted to roads."

The House-passed plan includes substantial increases in two major taxes. A 40 percent hike in the vehicle registration (license plate) tax would mean another $55 per year for commercial vehicles and $40 for passenger ones.

That accounts for $400 million of the total $600 million tax increase, while a 3.3-cent increase in the gas tax and a 7.3-cent increase in the diesel tax adds another $200 million. The tax on both fuels would then be 23.3 cents per gallon starting in October 2018, and would then increase with inflation.

The homestead property tax credit component of the package would expand eligibility for this income tax break by raising the household income cap from $50,000 to $60,000. In addition, the maximum value of the credit would rise from $1,200 to $1,500 in 2018.

The new House plan is projected to provide $400 million in additional funding for roads in fiscal year 2017, $440 million in FY 2018, $750 million in FY 2019, $950 million in FY 2020 and $1.2 billion in FY 2021.

The full package includes Senate Bill 414 and House Bills 4370, 4610, 4611, 4614, 4616, 4736, 4737, and 4737.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.