In a nutshell:

• Governor Whitmer’s $2.1 billion road plan revealed, with a 45-cent gas tax increase main piece
• There’s some targeted tax relief – a repeal of the pension tax and increase in Earned Income Tax Credit
• Education spending, K-12 and higher education all see more than inflationary increases

Governor Gretchen Whitmer unveiled her first executive budget today. Under the Governor’s plan for Fiscal Year (FY) 2020, the state budget would increase from $56 billion to $60.2 billion (3.5 percent), the highest level in state history. While a large portion of that change comes from increased taxes, the majority of new revenues will be going towards roads. Without the suggested new road revenues, the proposed budget is 2.5 percent larger than the FY2019 budget. In addition to the roads plan, the budget provides for some tax relief to those most affected by increased fuel taxes, and increased funding for education.

Here’s how it breaks down.

Fixing the roads

As expected, at the forefront of the Governor’s budget was the plan to “fix the damn roads,” an issue we recently examined in-depth. The proposed budget would increase road revenues by $2.5 billion. This revenue would come from a fuel tax increase of 45 cents per gallon, raising state fuel taxes to 71.3 cents per gallon, by far the largest in the nation. The tax would increase in three steps: 15 cents per gallon starting October 1, 2019, 15 cents on April 1, 2020, and the last 15 cents October 1, 2020. It is estimated that this would raise the average driver’s cost at the pump about $23 a month. In conjunction with the tax increase, the planned FY2020 diversion of $468 million in income tax revenue (General Fund) to the Michigan Transportation Fund would be eliminated.

In addition to increasing revenue for the roads, the proposal would also create the Fixing Michigan Roads Fund to alter the allocation of funding. While revenues from existing taxes will continue to be deposited into the Michigan Transportation Fund and follow the distribution outlined in Act 51, new revenues will be directed very differently. Much of the new revenue ($1.5 billion of the new $2.1 billion in gas tax once fully phased in) would be distributed for roads maintained by MDOT (primarily interstates, state highways, and principal arterials). The bulk of the remaining revenue will go towards local roads and bridges, with a small amount (about $64 million) going to public transportation and non-road infrastructure. Such a formula modification has been talked about for years, but never implemented.

Targeted tax relief

The second major component of the Governor’s proposal would increase tax relief programs to those hardest-hit by the new fuel taxes; low-income households and retirees on a fixed income.

The first of these tax relief efforts is to double the size of Michigan’s Earned Income Tax Credit (EITC), a work incentive program that provides low-income households a refundable credit based on their earnings. The size of the credit is tied to the amount of income a household receives; as a family’s income increases, the size of the credit increases, before slowly phasing out once certain income thresholds are met. The EITC is a federal program that many states piggyback on. Currently, Michigan provides taxpayers eligible for the federal program 6 percent of the credit they receive on their federal taxes on their Michigan Income Tax. Under the proposed budget, that would expand to a 12 percent match in FY2020.

Based on 2014 returns, the average Michigander eligible for the EITC receives a $143 credit. The credit is particularly targeted for low-income families; the average credit for taxpayers claiming two or more dependents was $227. About 750,000 tax filers received some EITC benefits. The proposal would expand benefits by about $114 million when fully implemented.

The second component of targeted tax relief is the repeal of the so-called “retirement tax.” As part of Governor Rick Snyder’s tax reforms implemented in 2011, the state drastically changed the way retirement benefits were taxed. Prior to that reform, public retirement benefits (including pensions) and Social Security benefits were exempt from income tax. Private retirement benefits were exempt up to certain income limits.

The 2011 reforms removed those exemptions; for those born after 1945, only a defined amount of retirement income are exempt. The proposed repeal would effectively revert back to the law prior to 2011. There are a couple of exceptions where individuals would be taxed more by pre-2011 law, but the proposed repeal would hold those individuals harmless by allowing them to keep their current exemptions. The State Budget Office estimates that the 400,000 affected households would save an average of $800 per year. The proposal would reduce state revenues by $355 million per year once fully in effect.

Education highlights

An overall increase of 3.5 percent ($526 million) to $15.4 billion – sizable for sure – highlights the K-12 budget recommendation.  But the real meat lies in the nooks and crannies of the proposal, both in terms of raw numbers but also in how the additional funding is slated to be divvied up.

The primary funding mechanism for school operations remains the per-pupil grant. The proposal would provide the lowest-funded districts a little more than an inflationary increase (2.3 percent or $180) to $8,051 per pupil. The school districts receiving the maximum foundation grant would receive a $120 increase that is less than inflation – $8,529 per-pupil. These increases would further reduce the gap between the minimum and maximum grants, a goal of 1994’s Proposal A, to $478 in 2019-20. In 2011-12 the gap was $1,173.The cost to the budget, $235 million, takes up nearly one-half of the overall K-12 funding bump.

The proposal claims to adopt concepts of a weighted student-funding formula. The idea is to allocate additional per-pupil dollars (weights), above the base amount, to districts educating students with extra needs (e.g., special education, at risk, English as a Second Language), in recognition of the additional costs some districts face in meeting those needs.

It is not clear, at first blush, whether there is substantive movement in the direction of such a formula. Rather, it appears that the budget largely makes modifications to existing categorical grants. Take for example the additional $120 million proposed to support special-education students. This recommendation relies on the existing district-wide cost reimbursement model used for years, but ups the state obligation from 28 percent to 32 percent of total costs. Special education funding will continue to be distributed this way rather than student-centric basis – a key characteristic of weighted formulas.

Other noteworthy adjustments designed to recognize differential costs based on student and district characteristics include an additional $102 million for “at-risk” funding; 20 percent reduction to the per-pupil grants of cyber charter schools because of their lower facility, maintenance, and transportation costs; and increased funding for career and technical students ($50 million).

Higher education appropriations would be increased by 3 percent for the 15 public universities and 28 community colleges. Apart from these increases, the most notable change in this area of the budget comes from a funding source change. The Governor’s plan backs out $500 million of School Aid Fund resources in support of university appropriations and replaces it with General Fund dollars freed up as part of her new road funding plan. The SAF funds are funneled back to the K-12 budget allowing for the increases there. Over $400 million from the School Aid Fund is continued in support of community colleges.

The road ahead

With today’s presentation of the Executive Budget to the joint appropriations committees, the baton has been handed off to the legislature. While some pieces of the proposal, like the repeal of the retirement tax, are already in the works, it is up to the legislature to act on the recommendations of the Governor.