The funding being proposed here calls for a combination of new gasoline and diesel fuel taxes. It also calls for a phased increase in these user fees over several years with indexing of the fuel taxes, but with sunset provisions. The proposal also calls for spending the bulk of the new money on a network of high priority state and local roads to assure maximum impact, rather than directing all the money into the current 50-year-old formula for distributing money around the state. New capacity on southeast Michigan roads such as I-75, I-94 and U.S. 23 would be provided using express lanes requiring user vehicles to be equipped with transponders that allow for automated time-of-day variable toll levels. No toll booths would be needed.
Our proposal also calls for raising more local funds for local roads, and providing incentive pools of matching money for local raised funds, private local funds, and local road efficiencies obtained through consolidation of road agencies and/or cost saving initiatives. The proposal also calls for changing some provisions that drain money from the Michigan Transportation Fund (MTF), enacting some cost saving reforms, and enacting a series of other general recommendations. The key is tying the new money to reforms regarding where and how the money is spent, and assuring accountability to the public.
The core of the revenue proposal revolves around generation of a 6-cent-per-gallon gasoline tax increase, and bringing diesel taxes into full parity with the gasoline tax with a 10 cent per gallon increase. These user fees would be increased over a three-year phase-in time period with the gasoline tax increasing 2 cents per year, and the diesel tax increasing by 3 cents, 3 cents, and then 4 cents in the final year. In order to assure accountability, these fuel tax increases would sunset after six years from enactment and would require a vote of the legislature to make them permanent. Should the fuel tax increases be sunsetted, we would recommend requiring a phase-in of the tax reduction over three years and that this provision be written into the original sunset language. This would allow for appropriate project planning.
We would also recommend that both gasoline and diesel taxes be indexed to Consumer Price Index inflation as was previously the case in 1984 in Michigan. The index should be capped at 5 cents per gallon of increase, but any increases in the cents per gallon from indexing should not be subject to any of the sunset provisions. Indexing is critical to maintaining the purchasing power of these funds and is consistent with the fact that all of Michigan’s other major taxes are in effect indexed. All funds raised through the index process would be divided 50/50 between the current formula and the new dedicated program funds described below.
After the full phase-in, the end result of these user fee increases will be $291.0 million in incremental gasoline tax revenues and $97.0 million in incremental diesel tax revenue. The total revenue increase would equal $388.0 million per year after three years and would represent a 19.4 percent increase on base 2004 registration and motor fuel taxes. The indexing provision, at a 3 percent CPI, would increase both the gasoline and diesel taxes by approximately .75 cents per gallon per year. The new gasoline rates would put us in the middle of neighboring state tax rates, while the new diesel tax rates would be below all neighboring state’s motor carrier diesel rates. However, including sales taxes, we would continue to have quite high levels of total taxation on fuel. The diesel increase would also help bring motor carriers driving typical 5-axle 80,000 pound GVW tractor trailers closer to paying the national average of 80 percent of the costs they impose on the road system.
We would further augment available MTF funds with several revenue enhancements. First, we would propose eliminating the motor carrier fuel tax collection fee for suppliers which equals 1.5 percent of motor carrier taxes – generating $14 million per year in revenue. There really is no strong rationale for providing a fee for fuel wholesalers to collect these excise taxes. There are very few other excise taxes that reserve a percentage of the fees to be paid to the collecting agencies, although retailers do receive some relief for collecting sales taxes.
We would also change the registration fee system so that registration fees would increase from the date plates were transferred to a new vehicle, rather than waiting until the owners birthday to assess the new fees. Registration fees are approximately 0.5 percent of the price of a vehicle the first year, and depreciate by fixed percentages for each of the next three years. The current system allows someone to take the fully depreciated plates from a low value vehicle acquired the day after their birthday, and then transfer those plates to a high value luxury vehicle, without having to pay the higher registration fees that would apply until their next birthday. This change would generate $24 million per year.
Current state law also provides for reductions in registration fees for a variety of industries. For instance, loggers pay lower registration fees than other for-hire carriers for their trucks. Milk trucks pay a discounted truck registration fee. Farm trucks in general pay discounted truck registration fees. Hearses have lower fees, as do nonprofits. While it will not be popular, these trucks and cars do just as much damage to the roads as any other vehicle of the same weight and type. There is no rationale for these kinds of exemptions other than a political one. Elimination of these discounts would generate a minimum $10 million per year for the Michigan Transportation Fund.
Finally, we would recommend significantly reducing the practice of using traditional transportation money to pay for the operations of the Secretary of State (SOS). The evolution of the system for funding the SOS with transportation monies is reviewed earlier in the report. By FY 2006, a total of some $98 million of MTF or TACF (funded with former MTF money) funds were transferred to the SOS, thereby allowing for a like reduction in what the SOS would have had to receive from the General Fund. SOS funding from existing and former MTF money should be reduced by $50 million per year, returning total MTF funding of other departments closer to the levels of MTF funding for all other departments in the 1998 to 2002 time period.
Nor is their any real logic in allowing this practice – after all – the K-12 Education Fund is not charged for the Treasury Department’s costs of collecting sales taxes that go into the K-12 Fund. Once before, in 1997, the Legislature reduced, by about half, the amount of money being diverted to the SOS from the MTF. While we have much deeper budget problems now, we would recommend that $50 million of the monies going to the TACF be redirected back to the MTF where it traditionally went, and that the General Fund contribution to the SOS be increased by a like amount. This will result in a $50 million increase in funding. Gov. Granholm, in 2002, supported the notion that the SOS should be reimbursed for “only their direct costs of collecting license and registration fees.” Some of the SOS costs being charged are “indirect.”
Overall these proposals would generate an additional $98 million per year that could remain in the MTF, bringing total proposed revenue enhancements to $486 million prior to any future indexing.