Governor Whitmer’s Budget: Centered on Roads and Education

Governor Whitmer presented her budget proposal to SEMCOG’s General Assembly last week, highlighting several areas of importance to local governments and schools.

While the word is out that the gas tax would increase by 45 cents a gallon over the next 18 months, casual observers probably failed to note how intertwined that change in tax policy is on the many parts of her new budget.

In past blogs, I have described the process by which the legislature has shifted school-aid funds out of the K-12 budget and into the university budget in order to shift General Fund money out of education and back into the state budget. Governor Whitmer’s budget reverses the direction the state has taken over the last few years, and the gas tax is a key element of the budget plan.

Governor Whitmer’s plan calls for a 45-cent-per-gallon increase in the gas tax. The tax will be increased in 15 cent increments on October 1, 2019, March 1, 2020, and October 1, 2020. The increased taxes will generate approximately $2.5 billion per year when fully implemented.

The governor’s plan calls for eliminating the dedication of $600 million of income tax revenues to our road system enacted in 2015, but not yet fully implemented. In 2020, $325 million in income tax revenue was scheduled to be deposited into the Michigan Transportation Fund to be distributed via the road formula. This $325 million will be replaced with the new gas tax revenues under the governor’s budget proposal.

While $325 million of the $2.5 billion raised will be distributed through the traditional PA 51 formula, the remainder of the gas tax revenues will only be used to upgrade Federal-Aid-eligible roads through a new formula. These are the roads that are evaluated for road conditions under the PASER rating system. Federal-Aid-eligible roads are the main roads found in our state that carry the vast majority of our daily traffic:

• 47 percent of the funds will be used on our freeway system;
• 30 percent will go to principal arterials, which are predominantly M roads and some local jurisdiction main roads;
• 14 percent will be split evenly between roads designated as minor arterials and major collectors;
• four percent of the funds will be used to maintain local bridges; and
• the remaining will go to multi-modal innovation projects and local rural economic corridors.

On a yearly basis, approximately $570 million will be distributed to local governments from the $2.137 billion in new revenues for roads; the remainder will be spent on state jurisdiction roads.

Left to right: Amy Mangus, Deputy Executive Director, SEMCOG; Kathleen Lomako, Executive Director, SEMCOG; Donald Hubler, Secretary of Macomb County ISD and First Vice Chairperson, SEMCOG; Chris Barnett, Orion Township Supervisor and Vice Chairperson, SEMCOG; Eric Sabree, Wayne County Treasurer and Vice Chairperson, SEMCOG; Governor Gretchen Whitmer; Brenda Jones, Detroit City Council President and Vice Chairperson, SEMCOG; Philip Weipert, Oakland County Commissioner and Chairperson, SEMCOG; Robert Clark, Monroe Mayor and Immediate Past Chairperson, SEMCOG.

Gas taxes impacting other parts of the state budget

Since the state will no longer be using General Fund revenues for roads, those revenues can be used for other purposes. The governor has indicated that she wants those revenues to undo the shift of School-Aid funds into the Higher Education budget. The governor’s budget will increase General Fund support for Higher Education, which will then allow the state to shift the School-Aid funds out of Higher Ed and back to the K-12 budget, where most believe they should have always been used.

In order to minimize the impact of the gas taxes on our household budgets, the governor has also proposed two changes to tax laws to assist lower-income or fixed-income residents. The governor is proposing that the state’s Earned Income Tax Credit be doubled and that pension and certain retirement income be exempted from income taxes once again.

One final note: Increasing the gas tax also means sales-tax revenues will increase. This increased revenue will enhance the School-Aid fund as well as constitutional revenue sharing.

What are the alternatives to a gas tax?

The governor outlined a few other options for raising the money necessary to fix our roads including:

• Increase the income tax rate from 4.25 percent to 5.3 percent
• Increase the corporate income tax from 5 percent to 19.5 percent
• Increase the sales tax rate to 7.5 percent
• Impose a statewide property tax of 7 mills for roads
• Increase vehicle registration fees by 180 percent

Each of these concepts generates $2.5 billion per year.