With flat budget, Gov. Whitmer’s search for Michigan road money gets harder

Update: Gretchen Whitmer’s plan to fix Michigan roads: Nearly triple gas tax

Gov. Gretchen Whitmer won’t have easy choices in her first budget when it comes to fulfilling her signature campaign promise to fix Michigan’s crumbling roads.

Raise money (such as new taxes or fees), or grab funds from other parts of the budget. Perhaps it’s some combination of the two.

The political calculus just got trickier amid a forecast that shows Michigan’s $10.7 billion general fund will remain flat next fiscal year, when the Whitmer administration’s first budget will take effect.

It’s not because Michigan is losing revenue. Projections show modest growth next year in income tax revenue, the primary funding source for the discretionary general fund. Estimates also are rosier than they were last May, as the economy continues its near-record-length expansion after the Great Recession.

Related: Michigan roads are a big mess. Here are eight big ideas to fix them.

Rather, the governor and Legislature are squeezed today by a road deal struck in 2015. That pact diverted hundreds of millions of income tax dollars to roads and expanded a property tax credit. Economists also say they anticipate job growth to slow in the next few years, with more economic clouds on the horizon.

In addition, more than $500 million in surplus general fund dollars have already been allocated — much of it at the end of 2018 before Republican former Gov. Rick Snyder left office, according to the state budget office — meaning the money won’t carry over for Whitmer, a Democrat, to build into her first budget. Surplus funds generally are used for one-time spending boosts, not to sustain long-term programs.

The details of Whitmer’s proposal to fix the roads will become clear over the next two months, when she outlines her policy vision in her inaugural State of the State address in February and rolls out her first budget proposal in March.

Whitmer campaigned on a plan to use $2 billion in tax dollars in a state infrastructure bank that could pay for road repairs and leverage extra money from Washington. She has not yet offered specifics on how she might raise the money each year, aside from asking the Legislature to raise user fees for roads or, if lawmakers choose not to, asking statewide voters to approve a bond.

Whitmer’s new budget director Chris Kolb, talking to reporters last week after a state revenue estimating conference, declined to say whether or how much new revenue might be included in the governor’s first budget.

But he noted the challenges of flat general fund revenue, saying the new administration is reviewing the impact of past legislative decisions that redirected income tax revenue.

“All those create more pressures on us, and we have to be aware of that,” Kolb said.

“You either have to have revenue existing, or you have to create it elsewhere by either increasing it or making cuts,” said Jordon Newton, a research associate with the nonpartisan Citizens Research Council of Michigan, which has studied the state’s budget pressures. “There will be discussions over what priorities there are, and how you balance those things.”

It will be difficult to find places to make cuts in other parts of the budget, said Charles Ballard, an economist at Michigan State University. It also will be a difficult political move to raise taxes, since Whitmer will have to get her budget past a Republican-majority Legislature that has been averse to tax and fee hikes.

Senate Majority Leader Mike Shirkey, a Republican from Clarklake in Jackson County, told Bridge he wants to allow the 2015 road-funding deal to fully phase in by 2021 before the state considers raising new revenue for roads.

House Speaker Lee Chatfield, R-Levering, has said Michigan’s road-funding problem exists in large part because the state charges a 6 percent sales tax at the gas pump and doesn’t use the revenue for roads, but rather for schools. He told Bridge negotiations with Whitmer’s administration could find ways to increase road funding while not harming schools, though he didn’t offer details.

The money is going to have to come from somewhere, Ballard said.

“The economics of this is pretty easy. The politics is really hard,” he said. “I can give you a list of revenue sources involving the income tax, the sales tax, the taxes on beer and wine, changes to the property tax. I can come up with the money tomorrow. But getting that to pass the Legislature is hard.

“If it were up to me, I would try really hard to bite that bullet and get some extra tax revenue and some fees” while gasoline prices are low, Ballard said. “If ever there was a time when the pain from raising the gas tax would be minimized, the time is now.”

Yet Michael LaFaive, senior director of fiscal policy for the free-market Mackinac Center for Public Policy in Midland, argues the state has plenty of room in the existing budget to pay for roads — starting by ending corporate tax incentives and other economic development programs.

The Mackinac Center opposes the use of tax incentives, contending they are less effective at creating jobs than policymakers promise. Redirecting money from incentives to roads “could have a much more positive impact on economic development by having sound, better infrastructure,” LaFaive said.

As to whether Whitmer will consider new revenue sources, “she has opposition in the Legislature, and they’re going to have to all come to terms with demands or wants, versus revenues,” LaFaive said. “We have a mandate to have a balanced budget, so I suspect we’ll find a way. I just don’t know where it all will land.”

Michigan governors have 30 days to submit their budget after the Legislature convenes its regular session — typically by February — though newly inaugurated governors have another month under state law.

It’s anticipated that Whitmer’s first budget proposal will be presented in March, though a date has not yet been scheduled.