Additional Revenues Must Be Linked to Offsets and Reforms

The current transportation funding system cannot give us the kind of road system we need or even keep us from falling further behind. But the way forward should involve a funding and spending plan that is part of a comprehensive strategy for addressing the state’s economic development and government services needs. As part of the solution, higher road user fees/taxes – linked to offsetting tax and spending cuts and other reforms – will be needed.

Other states have started aggressive programs to expand and improve their highway capacity in major urban areas and Michigan must do the same. In order to compete in the 21st century, Michigan must raise the amount of money available for highway spending through a 6-cent-per-gallon increase in the gasoline tax — from 19 cents to 25 cents. At the same time, while the evidence shows that truckers pay a fairly large share of the costs they impose, there is no way to justify a diesel tax that is lower than the gasoline tax as currently exists. Therefore, the diesel tax should be raised from 15 cents to 25 cents per gallon. These increases should be phased in over three years, and sunset after six years, with a vote of the Legislature required to extend the increases. The tax should be indexed to Consumer Price Index inflation as was the case prior to 1984. Virtually all of Michigan’s taxes are in effect indexed to inflation as they are tied to the value of goods or income. After the full phase-in, but before indexing, these taxes would raise $388 million per year. The indexing would raise the gasoline and diesel tax by approximately 0.75 cents per gallon per year at 3 percent inflation, and should be capped at 5 cents per gallon.

Michigan’s fuel taxes alone are quite low relative to other states. Michigan’s current gas tax is ranked 31st, while a 6-cent increase would put the state about 5 cents over the national average and slightly above neighboring states. For diesel on motor carriers specifically, Michigan currently ranks 45th without the sales tax.. After a 10-cent increase, Michigan would be a few cents above the national average but still almost 5 cents below neighboring states. With sales taxes included our current highway user taxes are quite high, however, sales taxes do not go towards roads.

While we do not recommend a general increase in registration fees, this study does recommend closing several loopholes in registration fee collections and reducing registration and other fee payments going to the Secretary of State’s office through the Michigan Transportation Fund and the Michigan Transportation Administration Collection Fund. These measures would raise another $98 million per year.

Altogether, this proposal would raise $486 million per year in state fuel taxes and registration fees before indexing.

In addition, more money should be raised at the local level for county/city roads, given the relatively low amounts raised locally in Michigan compared to other states. As part of this effort, county governments should be allowed to initiate county referendums on a countywide registration fee of $50. This fee could raise $500 million per year for county and city roads if enacted in all 83 Michigan counties. The money could be divided between county and city roads based on a legislatively directed percentage split, perhaps similar to the current formula between counties and cities.

But Michigan cannot afford a net tax increase. Offsets for these increases can come from cost savings and reductions in spending in other parts of state government. The Mackinac Center has proposed hundreds of state budget cuts adding up to billions of dollars. Just one Mackinac Center list of recommendations, including privatization of prisons, Medicaid reform and competitive bidding for public school teachers’ health care insurance could save the state $1.8 billion per year. While many of the spending reforms would require changes in the way the state operates, implementing just one-third of them would offset all of the state tax increases that are being proposed in this study.