For Immediate Release
September 9, 2015

Contact: Craig Thiel
517.485.9444
or Eric Lupher
734.542.8001

CRC Report: State Tax Earmarking Grows, Making Road Deal More Difficult

Michigan lawmakers continue to work towards a permanent road funding solution amounting to at least an additional $1.2 billion annually. In legislative deliberations targeting this amount, discussions seem to be coalescing around a potential solution that combines raising new transportation tax revenue and redirecting existing state funds toward roads. A new CRC report highlights that redirecting existing state dollars for roads is made more difficult by the growing amount of earmarked tax revenues and the shrinking share of discretionary resources available to policymakers.

While the state budget for the current year totals $53 billion, only $24 billion comes from state taxes and fees; the remainder is federal funds over which state officials have little or no discretion. Of total state funding, nearly two-thirds ($15.3 billion) is already dedicated to specific functions, including $1.9 billion for transportation purposes. Dedicating state funds, or earmarking, reduces the amount of discretion lawmakers have when deciding how to allocate finite resources among competing priorities.

“Currently, the poor condition of the state’s road infrastructure is a very high priority for Michigan citizens,” said Craig Thiel of CRC. “However, as lawmakers examine options for re-prioritizing state spending to address the road problem, they are finding that a significant share of the state’s tax yield is already dedicated to specific functions and that a relative amount of discretionary resources is limited.”

In addition to documenting the current amount of tax earmarking and common justifications and criticisms of the practice, CRC’s analysis examines earmarking changes over time. In 1995, following the adoption of the Proposal A school finance reforms, 58 percent of the total tax revenue was dedicated to specific functions. In 2014, 63 percent of tax revenue was earmarked. This difference of five percentage points is equal to an additional $1.3 billion in earmarked tax revenue today. If Michigan had maintained the share of earmarked taxes from 20 years ago, it would have an additional $1.3 billion in discretionary resources to allocate among spending priorities.

“Lawmakers really have themselves to blame for the inflexibility created by the high dependence on earmarking today,” said Thiel, “Nearly every tax change over the past 20 years has involved either dedicating greater portions of existing tax revenues or enacting new taxes with earmarked revenues.”

The report concludes that undoing the current level of earmarking may be very difficult, at least politically, for lawmakers. Those functions that currently benefit from earmarking are unlikely to support efforts that would subject their policy interests to annual budgetary scrutiny. However, if undoing current earmarks is a heavy political lift, another option for lawmakers could be to stop the current trend towards more tax earmarking.

CRC’s report is available at no cost on the Citizens Research Council’s website, www.crcmich.org.

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