SEMCOG looks at the House Transportation Funding Plan

Last week, I wrote about SEMCOG’s trip to the state capitol where we met with many legislative leaders regarding transportation funding. In that post, I described the rollercoaster emotional ride that everyone had as we went from office to office.

This week the rollercoaster type activity continues. The House of Representatives passed a package of bills to implement their vision of the future of transportation funding. Here is SEMCOG’s first look at the House Transportation Funding Plan.

The Michigan House of Representatives passed a seven-bill package last night to raise money for transportation purposes as well as create a series of income tax cuts. Revenues for transportation purposes are phased in between October 2016 and October 2020.

Timeline for Transportation Revenue Changes

October 2016 – All vehicle registration fees are increased 40% and additional fees are imposed on alternative fuel vehicles generating $400 million in new revenue, which is distributed through the PA 51 formula.
October 2017 – Diesel fuel taxes are increased by 4 cents per gallon generating $33 million in new revenue, which is distributed through the PA 51 formula.
October 2018 – Gasoline and diesel taxes are increased by 3.3 cents per gallon generating $169 million in new revenue, which is distributed through the PA 51 formula. $150 million in General Fund/General Purpose (GF/GP) revenues, currently generated from income taxes, is transferred to the transportation fund. This money is distributed to state and local road departments under the current 39.1/39.1/21.8% road formula. None of this money can be used for transit and other comprehensive transportation purposes.
October 2019 – The amount that is transferred from income tax GF/GP revenues is increased from $150 million to $325 million using the same distribution criteria as in 2018.
October 2020 – The amount that is transferred from income tax GF/GP revenues is increased from $325 million to $600 million using the same distribution criteria as in 2018.
October 2022 – The gasoline and diesel tax is indexed to inflation, but may not increase by more than 5% per year. (The cap is effectively no more than a 1 cent per gallon increase per year.)

What Does this Mean to our Transportation System?

The first big question: Is this a bait and switch program in the first year? Currently, the transportation budget contains $400 million in GF/GP funds. Does the state reallocate this money to other parts of the state budget when the $400 million in vehicle registration fees are levied starting next year which would result in no net change for transportation purposes? If this is the case, the transportation system will see no noticeable revenue improvement until 2019.

Problems with Using GF/GP Funding

Any time GF/GP money is used in the state budget, it is vulnerable to future budget cuts. This creates doubt beginning next year and becomes an even bigger issue as time passes and more GF/GP money is dedicated to the transportation budget. The money that is dedicated to transportation purposes is as secure as statutory revenue sharing was in 2002; in other words, one simple amendment to this law would allow the state to fix a $600 million state problem by raiding the transportation fund.

Income Tax Changes

Homestead Property Tax Credit
Michigan residents may receive money back from the state when they pay excessive property taxes as compared to their income. This money is returned through a refundable credit filed with the person’s income tax statement. This package of bills would increase the maximum on this refundable credit from $1,200 per household to $1,500; it also expands eligibility from households that have incomes of less than $50,000 to households of less than $60,000.

Controlling State Budgets through Income Tax Cuts

State budget disputes boil down to how the small discretionary part of state revenue is used – the General Fund/General Purpose revenue. Two-thirds of this revenue is generated by the state income tax. The House passed a bill as part of this transportation package that will require the state income tax rate be cut any time GF/GP revenues increase by more than the rate of inflation, beginning in 2019. This is similar to how Headlee impacts property tax collections for local governments. However, Headlee impacts property taxes in the year that they are collected. Under the House proposal, tax rates are reduced the year after the excess is collected. Income tax revenues are much more volatile than property tax collections, as assessed values react slowly to market shifts. A downturn in the economy has an almost immediate impact on income tax revenues. The new scenario created by this legislation can cause situations where the state will potentially be required to reduce tax rates in the midst of a year where revenues are already declining. This compounds budgeting concerns during times of fiscal stress.

Impact of Income Tax Cuts on Local Governments

The House plan to divert $600 million per year out of the current $8 billion generated in income tax revenue will create budgetary issues. This is on top of the $2 billion in income tax revenue already dedicated to the school-aid fund. Income tax revenue will also be reduced by changes to the Homestead Property Tax Credit. Income taxes are also effectively the source of funding for statutory revenue sharing. These combined changes create significant risk to the continued use of GF/GP for transportation purposes. It also creates a significantly greater risk to what remains of statutory revenue sharing. Because of term limits, the current House members will not be around to vote on the budget priorities they have created in this package of bills.