The Challenge of Road Funding

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It is widely believed that an additional $2 billion per year is needed to fix Michigan’s roads. Why is there not yet a road-funding package?

With the federal government running trillion-dollar annual deficits and spending a billion here and a billion there for various things, $2 billion might not sound like much money. However, $2 billion represents a substantial sum at the state level.

Michigan’s personal income tax will raise about $11.2 billion in fiscal year 2021-22. Raising an additional $2 billion would require increasing the personal income tax rate by roughly 0.75 points, from 4.35 percent to 5.1 percent. Michigan’s sales tax is estimated to raise about $10.6 billion in that same year. Thus, the sales tax rate would need to be increased from six percent to seven percent to raise an additional $2 billion. Michigan’s 26.3 cent-per-gallon gasoline and diesel taxes brought in about $1.4 billion in 2019. To raise an additional $2 billion per year, they would have to be more than doubled.

Michigan has an $11 billion general fund budget, which represents the State’s discretionary budget. Finding an additional $2 billion for the roads is not possible without a radical shift in spending priorities. Funding for Michigan’s colleges and universities comes out of the general fund. Even if funding for higher education was completely eliminated, it would only free-up an additional $1.3 billion. Likewise, funding for public safety comes out of the general fund. This would need to be reduced by 75 percent to raise the $2 billion needed to fix the roads. By far, the largest component of discretionary spending is spending on Health and Human Services, representing nearly half of general fund spending. This would need to be cut in half to raise $2 billion.

Past policy decisions play a significant role in road-funding challenges. Michigan created the Michigan Economic Growth Authority (MEGA) tax credit program in the 1990s. Geared toward the Big 3, it allowed companies to claim a state income tax credit for jobs created or retained by these companies. Despite receiving tax credits, the Big 3 continued to collectively decline, from 73 percent of the U.S. auto market in 1995 to 43 percent in 2018. Despite this decline, they continue to receive these tax credits. These cost the State about $500 million each year money that could otherwise have gone to the roads. Michigan also has to reimburse the approximately $500 million in lost revenue to local governments as a consequence of cutting the personal property tax that businesses pay. A recent expansion of the Michigan homestead property tax exemption also costs the State about $200 million in lost revenue. Together, these are more than half of what Michigan needs to fix the roads.

Fixing the roads requires politically difficult choices, namely a major tax hike, major redirection of current spending, or eliminating tax benefits for special interests. The longer these choices are delayed, the more expensive the road problem will get.

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