Road funding in Michigan takes several forms. Federal funding comes from the Federal Highway Administration’s Highway Trust Fund, which is funded by federal gasoline and diesel taxes. State funding typically comes from state fuel taxes, vehicle registration fees, income taxes and supplemental appropriations from the Legislature. Counties, cities and villages also provide funding for their own roads through road millages, general tax revenue and via special assessment districts. Public Act 51 of 1951, commonly referred to as just “Act 51,” governs how state revenue for roads and bridges is allocated and spent, with some of it dedicated for state roads and others shared with local governments for their use.
Federal Road Funding
Federal road funding from the Highway Trust Fund comes primarily from the federal 18.4 cents-per-gallon gasoline tax and 24.4 cents-per-gallon diesel tax. Federal highway funds are available for projects identified as federal-aid-eligible highways. Federal funds provide an 80 percent match of local or state funding for eligible projects and cannot be used for routine maintenance.
A common misperception is that Michigan is a “donor state” with regards to the federal Highway Trust Fund, meaning taxpayers pay more in federal fuel taxes than they receive in federal highway funding. According to data obtained by the Detroit Free Press in 2014, Michigan has not been a donor state since 2003. For example, Michigan paid $1.01 billion to the Highway Trust Fund in 2012 but received $1.05 billion from it. Federal highway funding makes up a little less than 30 percent MDOT’s budget. MDOT receives 75 percent of Michigan’s federal road funding, with county road commissions and cities and villages sharing the remaining 25 percent.
Michigan Fuel Taxes and Vehicle Registration Fees
Revenue from Michigan’s 26.3 cents-per-gallon gasoline and diesel taxes and its vehicle registration fees make up the bulk of the revenue that goes into the Michigan Transportation Fund. Money from the fund is then disbursed to MDOT, county road commissions and cities and villages. Vehicle registration fees contributed $1.2 billion to the MTF in 2017 while fuel taxes contributed $1.4 billion. Vehicle title fees contributed $40 million.
Michigan’s gasoline and diesel taxes were set at 19 cents per gallon and 15 cents per gallon, respectively, in 1997 and not indexed for inflation. They were increased in 2017 to 26.3 cents per gallon and will be indexed to inflation beginning in 2022. Vehicle registration fees were also increased by an average of 20 percent in 2017.
The state also assesses a 6 percent sales tax on fuel purchases, but nearly all of that revenue is dedicated to public schools and local governments. Electric vehicles are assessed a $100 annual surcharge and hybrid vehicles are assessed a $30 annual surcharge to offset the fact that owners of these vehicles either do not pay fuel taxes or pay substantially less than owners of conventional vehicles do.
Gasoline taxes for passenger cars are collected at the pump. Diesel taxes for interstate trucks operates much differently. Interstate trucks are covered by the International Fuel Tax Agreement, which provides a method for truck drivers to pay the appropriate amount of fuel taxes based on how many miles they drive in each jurisdiction. Truck drivers maintain a logbook that records the number of miles traveled in Michigan, calculate the diesel that was required to travel those miles, and then pay the Michigan diesel tax on that amount of fuel, plus the 6 percent sales tax.
The registration fees for passenger cars are based on the vehicle’s age and estimated base price. Registration fees for commercial trucks are based on the truck’s gross vehicle weight and range from $590 per year for trucks weighing 24,000 pounds to $3,741 per year for trucks weighing over 160,000 pounds.
There are exceptions, however. Trucks used as moving vans or to operate a carnival get a special registration rate that is 80 percent of the usual rate. It is unclear how much this reduces revenue to the MTF. Trucks that carry farm commodities, milk and logs also pay a substantially reduced registration fee that is not based on gross vehicle weight but instead is equal to 74 cents per 100 pounds of the weight of the tractor or empty truck. This reduces MTF revenues by an estimated $40 million per year. Approximately one-third of commercial trucks registered in Michigan pay this reduced registration fee.[*]
The annual registration fee paid by farm, milk and logging trucks is often less than that for a typical passenger car. In December 2012, farm trucks paid an average annual registration fee of $72.21, milk trucks paid $129.80 and logging trucks paid $107.30. The cost of a typical passenger car’s registration fee was approximately $120.
There is a widespread belief that Michigan’s weight restriction laws for commercial trucks are more generous than those in other states and this is largely responsible for the poor condition of Michigan’s roads. Most states use a truck’s “gross vehicle weight” to determine the maximum allowable weight on the road. A 1982 federal law limits GVW on federal-aid eligible roads to 80,000 pounds for an 18-wheel truck. Michigan instead uses axle load restrictions, which set the maximum allowable weight on a single axel. This allows for trucks weighing in excess of 80,000 pounds on Michigan roads, with a maximum of 164,000 pounds spread over 11 axles. Michigan’s weight restrictions are grandfathered in under the 1982 law. If Michigan repealed them, it could not reinstate them and would have to operate under the federal limits.
According to MDOT, pavement research shows that a single heavy truck does less pavement damage than two lighter trucks carrying the same combined load. This is, in part, because the weight-per-axle can be less for a single truck pulling two trailers compared to that of two lighter trucks each pulling a single trailer. MDOT also argues that repealing Michigan’s law would add 10,000 to 15,000 trucks on the road, resulting in increased traffic and business costs. However, how Michigan’s weight limits are set is less important than the question of whether the taxes and fees trucks pay is in line with the damage they do to Michigan’s roads. As shown later in this study, the fuel taxes and registration fees trucks pay are less than the estimated cost of the pavement damage they inflict.
How Michigan Transportation Fund Revenue is Distributed
Several government units, both state and local, receive money from the Michigan Transportation Fund, including the Michigan Department of Transportation, county road commissions, cities, villages and townships.
Michigan Department of Transportation
Michigan vehicle registration fees and fuel taxes generated approximately $2.6 billion in revenue in fiscal year 2017. Approximately $24 million of this was used for administrative overhead, with the biggest component being $20 million used to operate the Secretary of State. A total of $63 million in transportation revenues went to the Economic Development Fund and the Recreation Improvement Fund. Another $154 million was spent on administrative grants, debt service and other grant programs. After these deductions, approximately $2.3 billion in revenue was distributed to MDOT, county road commissions, and cities and villages to maintain and repair roads and bridges.
The Economic Development Fund was created in Act 51 to fund transportation improvements that support private investment and job creation. Its annual report cites five categories of road improvement projects eligible for assistance: for targeted industry development and redevelopment, to reduce urban traffic congestion, to create an all-season road network in rural counties, to support the development of commercial forests, and to support an all-season road network in urban areas of rural counties.
Approximately $41 million in MTF revenues went to the Economic Development fund in fiscal year 2017.
Two percent of gas tax revenue go to the DNR’s Recreation Improvement Fund, representing fuel taxes paid by off-road vehicles and motor boats. The Recreation Improvement Fund, in combination with the Michigan State Waterway Fund, helps fund the operation, maintenance and development of recreation trails, land restoration, inland lake cleanup and harbor and dock infrastructure.[†]
Another 10 percent of the MTF is earmarked for the Comprehensive Transportation Fund. Money from that fund is used to support public transportation throughout the state. Most of this money is allocated, based on a formula, to local transit agencies. In fiscal 2018, close to $250 million was disbursed from the MTF for such purposes.
The $2.3 billion remaining in the MTF after the monies described above were allocated were disbursed based on the following allocations: 39.1 percent goes to MDOT for the state trunkline fund, 39.1 percent goes to county road commissions and 21.8 percent goes to cities and villages. One percent of the Act 51 distribution to county road commissions is set aside for snow removal in counties that receive more than 80 inches of snow annually.
County Road Commissions
Act 51 distributes MTF funds to county road commissions based on a number of factors. How much each county receives depends on how many miles of certain types of roads it has, how many vehicles are registered there, its population and its annual snowfall. Graphic 11 summarizes these factors.
Graphic 11: MTF Distribution to County Road Commissions
||Percentage of MTF Distribution
|Primary Road Mileage
||$2,164 per mile
|Local Road Mileage
||$2,374 per mile
|Urban Road Mileage
||$12,390 per mile for urban primary roads, $2,065 per mile for urban local roads
||37ȼ per dollar collected in the county
|1/83rd Share to Each County for Primary Roads
||$1,056,287 per county
||$16.88 per person
||Based on average winter maintenance costs and actual snowfall
||$906,168,948 to counties
Source: Michigan Department of Transportation. Data from July 2017.
As seen from Graphic 11, the number of vehicle registrations within a particular county is the largest determinant of how many MTF dollars a county receives. If a county has, say, 5 percent of all vehicle registrations in the state, then the county will receive 5 percent of MTF dollars that are distributed based on vehicle registrations.
Each month, MDOT releases a set of distribution factors that allows a county to determine the amount of MTF dollars it will receive based on its population and road mileage. The factors are found by taking the total amount of MTF dollars available for a particular category and dividing that sum by the county’s population or number of road miles in that category. For instance, total MTF dollars available for primary county roads is divided by the total miles of primary county roads to arrive at $2,164 per mile. County road commissions would then multiply the number of primary county roads in their respective counties by $2,164 to determine their MTF allocation for primary road miles. The road commissions would make a similar calculation for each row in Graphic 11 to determine their total MTF distribution for the year.
The most recent allocation factors are given in the last column in Graphic 11. Each county receives $1,056,287 from the MTF plus 37 cents for every $1 residents in the county paid in vehicle registration fees. Rural areas, defined as areas outside of an incorporated municipality, receive an additional $16.88 per resident. Counties with urban roads receive $12,390 per mile for urban primary roads and $2,065 per mile for urban local roads. All counties receive $2,164 per mile for primary roads and $2,374 per mile for local roads.
It is not clear whether urban counties or rural counties disproportionately benefit from how MTF funds are distributed. On one hand, urban counties have more drivers, which amounts to doing more damage to the roads. On the other hand, rural counties have a large number of roads relative to their population, and it would be more difficult to maintain these roads if MTF dollars were distributed based strictly on population.
Graphic 12 illustrates this tradeoff. Counties are grouped into urban and rural counties based on U.S. Census data. Urban counties receive, on average, almost five times more MTF dollars than rural counties. However on a per capita basis, rural counties receive 57 percent more MTF dollars than urban counties. Rural counties have three times more miles of road per capita than urban counties. Thus there is a tradeoff in allocating MTF dollars on a population basis, which would benefit urban counties, and a miles of roads basis, which would benefit rural counties. The current MTF distribution formula tries to strike a balance between this tradeoff.
Graphic 12: MTF Distributions for Urban and Rural Counties, 2017
|Average MTF Distribution
|Distribution Per Capita
|Average Miles of Roads
|Miles of Roads Per Capita
Source: Author’s calculations based on data from July 2017 MDOT reports and data from the U.S. Census.
Graphics 13-16 illustrate average road and bridge conditions for urban versus rural counties. They show that there is essentially no difference in average road conditions in urban versus rural counties. And there are only minimal differences in the average condition of bridges. This suggests that Act 51 might be striking the right balance in allocating MTF dollars.
Graphic 13: Average Road Conditions in Rural Counties, 2017
Graphic 14: Average Road Conditions in Urban Counties, 2017
Graphic 15: Average Bridge Conditions in Rural Counties, 2017
Graphic 16: Average Bridge Condition in Urban Counties, 2017
Cities and Villages
Seventy-five percent of MTF funds distributed to cities and villages are used for major streets and 25 percent are used for local streets. Sixty percent of the major and local street distribution is based on population and 40 percent is based on road miles. The MTF funds used for local streets must be matched by the municipality.
As it does with counties, each year MDOT uses allocation factors to distribute MTF revenue to cities and villages. The distribution is based on population (as of the latest U.S. Census) and road miles. Unlike counties, cities and villages with a larger population get a larger per capita allocation from the MTF. That is because the number of miles of major streets in a city or village is multiplied by a population factor to determine the MTF distribution. This population factor increases with the city or village’s population. Graphics 17 and 18, which use data from Plante Moran’s “Estimated Act 51 Revenue Worksheet” for the fiscal year ending June 30, 2018, illustrates the range of the factor:
Graphic 17: MTF Distribution to Cities and Villages
||$43.96 per person
|Major Street Mileage
||$12,660.75 per mile
||See Graphic 18
||2 x $12,660.75 per mile
||See Graphic 18
||$14.65 per person
|Local Street Mileage
||$3,335.25 per mile
Graphic 18: Population Factors
Note: For a population over 320,000, a factor of 2.1 is used plus an additional factor of 0.1 for every 160,000 of population over 320,000
A city or village receives $43.96 per person for major streets and $14.65 per person for local streets. It also receives $3,335.26 per mile of local streets. There are a couple of things to note about how major street mileage funds are distributed. First, the amount per mile increases as the municipality’s population increases. A municipality receives $12,660.75 per major street mile times its population factor. Thus a city or village with 1,000 residents would receive $12,660.75 x 1.0 or $12,660.75 per major street mile. A city or village with 100,000 residents would receive $12,660.75 x 1.9 or $24,055.4 per major street mile. Michigan’s largest city, Detroit, with a population of 713,777 in the 2010 census would receive $12,660.75 x 2.3 or $29,119.70 per major street mile. Thus, major street mileage funds are skewed toward large cities.
Second, some cities also get funding for trunkline miles. This funding allocation, available to cities with over 25,000 residents, is based on a formula: the city’s population factor multiplied by the number of trunkline miles within it. This allocation heavily favors Detroit, which has 22 percent of all trunkline miles in the state that run through cities with a population of 25,000 or more.[‡] Since Detroit’s population factor is 2.3, this trunkline mileage distribution nets the city an additional $17 million per year.
There is no clear reason why this distribution for trunkline mileage exists. As the House Fiscal Agency points out, maintaining trunklines within municipal boundaries is the responsibility of MDOT, not the municipality. Cities and villages with a population over 25,000 do have to contribute funds toward trunkline improvements, but their contribution is small. Cities with a population over 50,000 have to pay 12.5 percent of the project’s cost, cities with a population between 40,000 and 50,000 pay 11.25 percent, and cities with a population between 25,000 and 40,000 pay 8.75 percent of the cost. Limited access highways, such as interstate highways, are exempt from this cost sharing requirement. This exemptions benefits cities such as Detroit, given the numerous miles of limited access highways that run through it.
In addition to these issues, the per-mile trunkline distribution is double what is allocated for major street maintenance and repair, which cities are responsible for maintaining. Approximately $61.5 million was distributed to cities for trunkline maintenance in 2017, even though cities are not responsible for maintaining these roads.[§]
In short, distributions from the Michigan Transportation Fund to cities and villages function in a similar way to counties in that the distribution is based on population and road mileage. Multiplying major road mileage by a population factor and giving municipalities with a population over 25,000 an allocation based on trunkline miles (which is also multiplied by the population factor) skews the distribution toward larger cities. Money distributed to counties is not, by contrast, skewed this way.
Counties, cities and villages have some flexibility in how they spend MTF dollars. With some exceptions, they can transfer some of their earmarked funding for other purposes. For example, counties can divert up to 30 percent of their funding earmarked for primary roads to local roads, if they choose. Conversely, they can shift 15 percent of their funding earmarked for local roads to maintaining and constructing primary roads. They can spend another 15 percent of local road funding on primary roads, in the case of an emergency or with the specific approval from MDOT. Cities and villages can also use MTF funding earmarked for major streets on local streets, provided that the work is for maintenance and not construction and that it does not exceed 50 percent of the municipality’s major street funding, unless it adopts an asset management process and sends a copy of the plan to MDOT.
Local Road Millages
Some counties, townships, cities and villages supplement their MTF distribution with local property tax levies. Graphic 19 gives information on these local road millages, based on data from 2017.
Graphic 19: Local Road Millages
|Unit of Government
||Number With Road Millage
||Total Units of Government
||Percent with Road Millage
||Average Millage Rate
Source: Michigan Department of Treasury
A mill is a $1 tax per $1,000 of assessed taxable value, which is approximately equal to one-half of the sale price of the property. A homeowner with a $200,000 house in a city levying a 2.7235 millage would owe a $272.35 property tax toward the city’s roads. It’s difficult to determine the impact these local millages have local governments’ ability to maintain their roads, as they depend heavily on the millage rate and the local property value in the jurisdiction. They could, however, be a significant source of road funding for some municipalities.
There is some evidence that road millages improve road quality for cities and villages. However, it is hard to determine the relationship between the road conditions and road millages in a county because both counties and townships can levy millages, but PASER data is only available at the county level. With this limited data, it would be impossible to know if an individual township’s road condition was improved by its millage.
Since cities and villages are responsible for maintaining certain roads and PASER data exists at the city and village level, it is possible to calculate a correlation between municipal millages and road conditions. For cities, there is a strong correlation between the two. Fifty-eight percent of roads in cities without a road millage are in poor condition, on average. If a city has a road millage, each mill is correlated with a six-point reduction in the percentage of its roads that are in poor condition, a result that is statistically significant. In other words, a city with a one-mill road millage will have 52 percent of its roads in poor condition, on average, compared to 58 percent for a city with no road millage.
The correlation is weaker for villages. Forty-seven percent of roads in villages without road millages are in poor condition. Each mill of a road millage is only correlated with a three-tenths of a point reduction in the percentage of roads in poor condition, a result that is not statistically significant. One potential explanation for this is that villages have smaller populations than cities and typically less taxable property value, so a road millage in a village might not collect as much revenue as a road millage in a city, limiting the number of improvements the village can undertake. A village might just need a substantially higher millage rate than a city to get the dollars needed to improve its average quality in a way that would make a significant difference. The average road millage for villages is 3.3 mils, one mill higher than the average rate for cities.
Special Assessment Districts
Neighborhood streets in a subdivision within a township are under the jurisdiction of the county road commission. County road commissions typically maintain, repave and reconstruct these roads frequently, likely because they give priority to other, more-travelled roads under their jurisdiction. Nevertheless, residents who wish to have these types of roads maintained can petition to create a “special assessment district” for the purpose of levying a tax on property owners in a defined area. SAD taxes must increases the value of properties in the district.
Residents in a proposed SAD must get 50 percent of property owners to sign a petition for the SAD plan to move forward. Once this happens, a public hearing is held for residents to express support for or opposition to creating a district. If a majority of the board of directors of the county road commission votes to create it, the work to be supported by the special assessment is bid-out and a second public hearing is held to discuss the required costs. If final approval is given by the board to authorize the work and assessment, the SAD is created and the cost shared amongst its residents.
According to the Michigan Department of Treasury, only three municipalities have SADs dedicated to road funding: the townships of Clarence, Porter and Lenox in Calhoun, Van Buren and Macomb counties, respectively. The vast majority of special assessment districts used in the state are for fire services.[**]
MTF Revenue Trends
To summarize, nearly half of all county, city, and village roads in Michigan are rated as being in poor condition, with over half of Michigan’s trunkline roads projected to be in that state by 2024. How did Michigan’s roads end up in this condition?
The main problem appears to be that MTF revenues have not kept up with inflation, as shown by Graphic 20. Several years near the beginning of the century were especially difficult for the fund, with revenues falling even without adjusting for inflation.
Graphic 20: Inflation-adjusted MTF Revenue Distributions, 1997-2017
Before the fuel tax and vehicle registration fee increased in 2017, MTF revenue had fallen by 25 percent from its peak in 2000. Even with the tax and fee increase, MTF revenue still remains approximately $70 million below that peak.
Complicating matters further, the cost of maintaining and constructing roads steadily increased. In other words, the real purchasing power of the money government officials have to spend on road maintenance declined substantially.
For instance, the price of crude oil plays a substantial role in determining how far road dollars will go as it is an important ingredient in asphalt. Graphic 21 plots the monthly price of a barrel of West Texas Intermediate crude oil versus the monthly price of a ton of liquid asphalt. Since the price of a ton of asphalt is roughly five times that of a barrel of crude oil, dividing the price of asphalt by five makes the relationship between the two easier to see. Note that the two lines appear to move in tandem.
Graphic 21: Price of Crude Oil vs. Price of Ton of Liquid Asphalt
Graphic 22 illustrates how much asphalt could be purchased if all MTF revenue was used only on asphalt. Obviously, MTF revenues are used for things other, too. This figure simply shows how fuel tax and vehicle registration fee revenue are not keeping up with the increasing price of asphalt. Between 2008 and 2015, MTF revenues were only able to purchase, on average, less than one-quarter the amount of asphalt as in the year 2000. Even after the fuel tax and vehicle registration fee increase in 2017, MTF revenues could only purchase half the asphalt they could in 2000.
This problem is worsened by the fact that drivers might respond to higher crude oil prices — and increased gas prices — by driving less. Rising crude oil prices discourages drivers from spending on fuel, which reduces the state’s tax revenue for roads. At the same time, the price increases in crude oil makes asphalt more expensive. In other words, increases in crude oil prices harm road financing from both ends: they reduce revenues and make road work more expensive.
Graphic 22: How Much Asphalt MTF Revenues Could Purchase, 2000-2017
Graphic 23 describes the problem in more detail. Between 2000 and 2016, MTF revenues increased an average of 0.8 percent per year. During the same time period, inflation (as measured by the consumer price index) averaged 2.1 percent per year and crude oil prices increased by an average of 5.5 percent per year. Asphalt prices increased by an average of 7.3 percent per year.[††] The table below also illustrates this trend for the years before the Great Recession. Between 2000 and 2007, MTF revenues increased by an average of 1.1 percent per year. Inflation averaged 2.7 percent growth annually, while crude oil and asphalt increased by a yearly average of 14.5 percent and 11.4 percent, respectively. In short, MTF dollars failed to keep up with costs, which likely impacted the condition Michigan’s roads are in now and projected to be in the near future.
Graphic 23: Purchasing power of MTF revenues, annual average change, 2000-2016
For much of 2001, the nation was in a recession, which the National Bureau of Economic Research estimates ended in November of that year. But while the rest of the nation recovered following this downturn, Michigan’s economy entered a “one-state recession” that lasted until 2007 when the state, along with the rest of the nation, entered the Great Recession, which ran from December 2007 through June 2009.
Graphic 24 compares the performance of Michigan’s economy with the national economy between the end of the 2001 recession and the start of the Great Recession, as well as from the end of the 2001 recession to 2017. From 2002 to 2007, the national economy grew by an average of 2.7 percent annually, while Michigan’s economy shrank by an average of 0.6 percent annually, as measured by gross domestic product. Per capita personal income shrank by an average of 0.3 percent annually in Michigan, while nationally it grew by an average of 1.2 percent annually. The Michigan unemployment rate was also, on average, 1.6 percentage points higher than the national unemployment rate. As seen from Graphic 24, the national economy outperformed the Michigan economy for the entire 2002-2017 time period.
The slowdown in the economy resulted in a slowdown in vehicle miles driven and thus a reduction in dollars going into the MTF. Nationwide, drivers traveled about 12 percent more miles in 2016 than in 2002. In contrast, Michigan drivers traveled only 1 percent more miles over the same period. Thus Michigan’s road funding experienced a double-whammy: tax revenue went down even as the cost of maintaining roads went up.
Graphic 24: Michigan vs. National Economy, 2002-2017
||Per Capita Personal Income Growth
||Per Capita Personal Income Growth
[*] In December 2012, there were approximately 80,000 trucks registered who paid the full registration fee based on GVW and 47,000 registered farm, milk, and logging trucks that paid the discounted registration fee. See “Michigan’s Truck-Weight Law and Truck-User Fees” (Michigan Department of Transportation), https://perma.cc/ 9EN7-U2QQ.
[†] The Waterway Fund receives 80 percent of the revenue generated from the 2 percent of gas tax revenue that is devoted to the Recreation Improvement Fund. Another 14 percent of this revenue is dedicated to snowmobile trail construction and maintenance. “Where the Money Comes From” (Michigan Department of Natural Resources, 2018), https://perma.cc/3J7M-KYEZ; “Recreation Improvement Fund” (Michigan Department of Natural Resources, 2018), https://perma.cc/ VFT4-UU8L.
[‡] As of April 2018, there are 1,332.07 miles of trunkline roads running through Michigan cities with a population of 25,000 or more. Detroit has 290.9 of these miles. “City/Village Population and Mileage: MTF Distribution Month: April, 2018” (Michigan Department of Transportation, May 22, 2018), https://perma.cc/8FKQ-9NJ9.
[§] Trunkline mileage funds are allocated based on two times the population factor, times the number of trunkline miles in the city, times $12,660.75 per mile. “City/Village Allocation Factors” (Michigan Department of Transportation, 2018), https://perma.cc/U9PQ-PTWX.
[**] This data can be found here: https://eequal.bsasoftware.com/ MillageSearch.aspx.
[††] I use the time period 2000-2016 because 2017 is an outlier in that MTF revenues increase by 26 percent due to the increase in the gas tax and vehicle registration fee. This pulls the average for the entire time period up to a 2 percent increase, which gives a misleading picture about what was happening to MTF revenues during this time period.