What we found:
- Governor Whitmer’s Executive Budget proposes raising $2.5 billion in new fuel tax revenue, but road spending will only increase by $1.9 billion when fully phased in.
- The proposal would eliminate $600 million in General Fund revenues planned by the 2015 roads package. Those dollars were originally supposed to come from revenue growth associated with a strong economy.
- Ultimately the 2015 package has contributed to a tight General Fund budget, and correlates with increased School Aid Fund support for higher education.
As part of the Fiscal Year 2020 (FY2020) Executive Budget, Governor Gretchen Whitmer has recommended a 45-cent per gallon fuel tax increase, phased in over the course of a year, to address the state’s deteriorating road infrastructure.
This piece of her plan has been well-publicized and hotly discussed all over the state. Far fewer know about a plan to eliminate the General Fund component of the 2015 road funding package. When fully phased in, in FY2021, the proposed tax hike would raise $2.5 billion in new transportation revenues, but after factoring in the removal of the General Fund resources from the roads budget, spending would only increase by $1.9 billion.
What is the rationale for reversing course on the 2015 plan and removing a portion of the planned road spending? Where do these dollars end up in the budget?
Fueled by growth?
The 2015 road funding package was designed with two components. One is a combination of motor fuel and vehicle registration tax increases, to raise $600 million in new revenue, which took effect January 1, 2017. The other, a reallocation of $600 million in state revenue to roads. The revenue diversion (a fixed amount of Personal Income Tax revenue) is scheduled to phase in over three years; FY2019 ($150 million), FY2020 ($325 million), and FY2021 ($600 million). Additionally, the 2015 package also expanded the Homestead Property Tax Credit to provide relief to low-income households faced with higher transportation taxes; this expansion is expected to lower General Fund revenues by $200 million.
The 2015 road package was a compromise between a call for increasing taxes and redirecting existing state resources to finance increased spending. At the time, there was concern that existing budgetary pressures could create problems if the state relied too heavily on the existing budget resources to fund $1.2 billion in new transportation spending. What many people probably don’t recall was the underlying justification to redirect future General Fund revenue to roads. At the time, it was suggested that annual state revenue growth driven by economic expansion would be sufficient to pick up the added transportation spending.
So did that happen?
Tight General Fund
In a word: No. As the state plans for the second year of the 2015 road plan phase-in, projections show that General Fund revenue growth for FY2019 was not sufficient to pay for the additional transportation spending without drawing resources from other state functions (Table 1).
Baseline revenue, which allows for a more comparable revenue number from year to year because it measures revenue growth prior to factoring recent changes in laws, declined slightly from FY2018 to FY2019. While the state does not project baseline revenues out more than three years in advance, projections from the May 2015 Consensus Revenue Estimating Conference projected a 3.6 percent growth in net revenues for FY2019; revenue growth for the year was not as strong as projected when the road funding bill was passed. As a result, the $150 million increase in road funding for that fiscal year had to be funded from a smaller pool of resources, rather than receiving funding explicitly from revenue growth.
General Fund annual baseline growth and 2015 road funding plan (millions)
Revenues are projected to grow faster than planned diversions to road funding for FY2020 and FY2021, but the size of the General Fund pool after road funding is projected to increase by only $2 million. That comes before accounting for programmatic changes that the General Fund budget has to pick up, including caseload adjustments (like Medicaid enrollee counts and prisoners in the state corrections system), inflation, or the $200 million revenue reduction from the Homestead Property Tax Credit. The 2015 road funding obligations, and a series of other General Fund pressures, have led to a tight General Fund picture for new road funding dollars or other priorities.
While revenue growth is projected to reach the $600 million the legislation planned to allocate for roads, FY2019 growth was not sufficient to fund the entirety of the year’s road spending commitments. If the revenue loss from the Homestead Property Tax Credit ($206 million) is included, General Fund baseline growth after factoring in diversions to road funding were net negative by nearly $380 million for FY2019.
State policymakers increased the portion of higher education spending that comes out of the state’s School Aid Fund to make up for the shortfall. The portion of higher education spending from the School Aid Fund more than doubled, from $238 million (14.6 percent of the higher education budget) in FY2018 to $500 million (30 percent) in FY2019.
Governor Whitmer’s proposal backs out the $600 million road allocation scheduled from the General Fund, and uses the money to remove, dollar-for-dollar, the School Aid Fund appropriation in higher education. In effect, this frees up $500 million for K-12 funding, and an additional $100 million in General Fund resources for FY2021 onward. But that figure ignores the spillover costs from the 2015 package; the School Aid Fund ended up taking on a larger share of higher education spending.
The Governor argues the plan would raise $2.5 billion in new road revenue. Critics argue that it raises $2.5 billion in revenues, but only increases road funding by $1.9 billion. The reality of the situation is closer to the middle. Some of the new fuel tax dollars will free up General Fund dollars to fund the entirety of the higher education budget. But some of those resources were diverted to roads because revenue growth has not been as strong as expected.