With a series of votes late last night, the Michigan House finally broke the trend of recent near-misses as the Legislature succeeded in passing a comprehensive road funding package. The bills now move to Governor Snyder’s desk, where he is expected to sign them into law. The legislation will eventually generate $1.2 billion in additional annual revenue earmarked for road maintenance and repair. That revenue comes from three primary sources: (1) increased motor fuel taxes – the typical driver will pay about $45 more per vehicle per year; (2) higher vehicle registration taxes – the average auto-owner will pay an extra $20 per year for his or her vehicle; and (3) new earmarks of existing income tax revenues for roads – reducing the state’s general fund by $600 million annually once the earmarks are fully phased in.
A very important word in the last paragraph is “eventually”; the plan doesn’t start raising road revenue until FY2017. And while Governor Snyder had called for a plan that is “fiscally responsible,” it is not clear that this plan takes any immediate pressure off the state’s general fund. Here are three key things the public should know about the plan as it awaits the Governor’s signature.
1) The plan doesn’t generate $1.2 billion in new road revenue for five years.
The consensus figure around which the road debates have focused is that Michigan needs at least $1.2 billion in additional annual revenue for road infrastructure to begin making progress on reversing the state’s deteriorating road conditions. However, as illustrated in the table below, the approved plan doesn’t identify additional revenue at that level until FY2021.
The plan will generate no immediate revenue. The 7.3-cent per gallon gasoline tax increase and 20 percent registration tax increase don’t take effect until January 1, 2017 (three months into FY2017 and after the conclusion of next summer’s road construction season). And the first increment of the earmarking of state income tax revenue ($150 million) doesn’t occur until FY2019. The indexing of motor fuel tax rates to inflation – a key component of virtually all recent plans – does not begin until 2022. As a result, for FY2017, the plan is estimated to generate $407 million in new tax revenue for roads – that’s $793 million short of what most road officials believe is needed.
Source: CRC calculations based on House Fiscal Agency analysis of enrolled package. “Road revenues” exclude formula allocations to the Comprehensive Transportation Fund for non-road transportation purposes.
2) Enacting the plan won’t end the deliberations on road funding.
When lawmakers begin deliberations on the FY2017 budget next February, they will be working with only $407 million in additional revenue for Michigan’s roads if estimates hold true. As a result, the Legislature and Governor will be forced to decide whether (and how) to supplement the new revenues that they will have under the plan to reach the $1.2 billion threshold. Effectively, there will only be two choices: either make do in the short run with the road revenues available under the plan and wait for the rest of the eventual revenue down the road; or find additional revenues from some other source to top off the state’s existing dedicated road revenues.
Either choice will have consequences. Making do means that road conditions further deteriorate in the short run as the full necessary state investment in the road system is delayed. That also pushes up future costs given that restoring the state’s road infrastructure gets more expensive as current road conditions get worse. On the other side, the most likely “other source” for road revenue is additional allocations from the state’s discretionary general fund; which brings us to our next point.
3) The plan doesn’t really take a lot of pressure off the state’s general fund revenues.
The Governor has called for a “fiscally responsible” plan that doesn’t imperil the state’s budget picture in the short run. Already, the FY2016 budget contains a $400 million general fund appropriation for road purposes. However, relying on general fund dollars means less revenue is available for other state programs. As illustrated in a recent CRC budget note, permanently allocating $600 million in general fund revenue for roads would necessitate overall cuts in the neighborhood of 5 percent to all other GF/GP-financed programs in FY2017 when both current revenue estimates and known spending pressures are taken into account.
In that respect, an important element of the approved plan is that it delays any immediate earmarking of the state general fund; the state income tax earmarking that will cut into general fund revenues doesn’t begin for several years. On its face, the plan eases the burden on next year’s budget by not incorporating any immediate redirection of general fund for road repairs into law.
But as outlined in the first two points above, if state policymakers want $1.2 billion in new road revenue anytime soon, they will find themselves in a quandary. For FY2017, the approved plan’s new revenue is expected to be about $793 million short. If the lawmakers want to have anywhere near $1.2 billion in new road resources, they will likely have to turn once again to the general fund for that revenue, which means cutting in other areas. And three-quarters of the state’s general fund appropriations cover three big-ticket items within the state budget: Medicaid, corrections, and higher education.
In short, as the celebration begins in Lansing over finally breaking the road funding logjam, both lawmakers and the public should be aware that while the plan does eventually identify $1.2 billion in new annual road resources, it leaves open some important questions as to what the State will do for the roads while we wait for the bulk of the new revenue to be realized.