Look to sales tax on gas to help fix Michigan roads, report suggests

August 2019: Pressure builds on Michigan Republicans for roads plan to avoid shutdown
Update: Gretchen Whitmer’s plan to fix Michigan roads: Nearly triple gas tax

Michigan policymakers looking to find money to fix the state’s crumbling roads should consider untying the sales tax from gasoline sales, according to a new road-funding analysis released Tuesday.

Doing so would allow lawmakers to increase the state gas tax by roughly 15.5 cents per gallon — replacing the estimated $894 million in annual sales tax revenue from fuel purchases that now doesn’t go to fixing roads — without also causing gas prices to rise, said Eric Lupher, president of the nonpartisan Citizens Research Council of Michigan, which evaluated the state’s road-funding options.

May 31, 2019: See how much a 45-cent Michigan gas tax might cost you

That’s because, even though Michigan levies its 6 percent sales tax on gasoline, the money collected at the gas pump goes instead to public schools, local revenue sharing and public transit.

“The disentanglement of motor fuels and the Sales Tax should be a priority,” according to the Citizens Research Council’s analysis, “Evaluating Michigan’s Options to Increase Road Funding.”

“Exempting motor fuels from the Sales Tax and increasing fuel tax rates an equal amount would make taxation on motor fuels more transparent and promote the user fee approach ingrained in road funding in Michigan.”

Removing the sales tax on gasoline, however, would create a shortfall in several other budget areas, including schools.

Such are the choices lawmakers face, as Michigan’s road-funding debate is poised to begin in earnest.

Democratic Gov. Gretchen Whitmer intends to outline her road-funding proposal in her first budget presentation next week. Several independent studies have found that Michigan is at least $2 billion short per year of the amount needed today to fix existing roads.

Former Republican Gov. Rick Snyder in 2015 signed into law a $1.2 billion road-funding package consisting of higher gas taxes and vehicle registration fees and diverted income taxes that won’t be fully phased in until 2021.

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Experts since have said Michigan roads will continue to deteriorate because the amount of revenue is insufficient to get enough roads into good or fair condition.

Republican legislative leaders — Senate Majority Leader Mike Shirkey and House Speaker Lee Chatfield — have said that while new money is needed to reverse Michigan’s decades-long disinvestment in roads, it should not come before identifying the road-funding need and making roads a priority in current spending.

Chatfield has said he supports removing the sales tax from gasoline purchases, but has not outlined a specific plan to replace the money that goes to schools and other programs.

“It would be desirable with such a policy decision to backfill the School Aid Fund and to add to state revenue sharing funding with revenues from other taxes to make up for the revenue decline caused by the shrunken tax base,” Citizens Research Council wrote.

The analysis breaks down the pros and cons of multiple road-funding options.

Gas taxes, for instance, amount to a user fee on roads users but are an unreliable long-term option as cars become more fuel efficient. Borrowing money can speed construction timelines but leave Michigan indebted.

The analysis offers several principles that it says policymakers should consider when deciding how to address Michigan’s road-funding shortfall, including:

If existing general fund resources are used for roads, don’t create problems for other areas of the budget. Policymakers should look at backfilling the spending that has been taken from another state program or department, Lupher said in an interview.

“If roads are our highest priority, then we should fund it accordingly, so nothing should be off the table,” he said.

“At the same time, we do have other priorities, and let’s not create a problem for corrections or universities or K-12 education to fix this problem.”

Bonding is a useful tool, but it’s not a way to raise money for ongoing road maintenance. Instead, Lupher said, bonds are best used for one-time, large projects, such as a freeway reconstruction, because they have to be repaid over long periods of time, with interest.

Any discussion of road funding also should include a conversation about the formula used to distribute road dollars to cities, villages and counties. Revenue from state gas taxes and vehicle registration fees is divided among the state, cities and counties for roads through a formula created under Public Act 51 of 1951. The state and counties each get 39 percent of the funding, while cities and villages receive 22 percent.

“The current Act 51 allocation ignores road capacity, which is a true indicator of costs, and road usage, which is a key driver of degradation,” according to the report. “It does not direct funds to the roads in the poorest condition. If funding does not reflect the realities on the ground, increases will have less of an effect on road condition, while some road agencies will be over-funded.”

Piecemeal approaches to road funding will not work. Regardless of the method, raising enough money to fix the roads for the long term “will require a significant investment from the state,” the report states. “Boosting funding in small amounts, or for short periods of time, will mean new construction and maintenance will not be maintained as efficiently. If the legislature chooses to increase funding, those increases should be sufficient to reconstruct roads to high standards and maintain them throughout their life cycles.”