House and Senate Pass Competing Road Funding Plans

Two separate plans to increase Michigan road funding are now on the table, one passed by the House and one by the Senate. In contrast to Proposal 1, which rejected 80-20 by Michigan voters in May, neither plan relies solely on a large tax hike.

The House plan, passed in May, would provide around $1 billion for roads, only a little of which is from tax hikes. Like the Senate plan, it redirects a portion of state income-tax revenue to roads, and offsets this by cutting corporate welfare, scrapping a state earned income tax credit, and making other changes.

In contrast, the plan passed by the Senate this week raises an estimated $1.4 billion for roads annually, half from increasing gas and diesel taxes to 34 cents per gallon by Jan. 1, 2017, and half from reallocating $700 million in annual income tax revenue to roads. The Senate also includes a provision that could lead to future income tax cuts, loosely tied to increases in state revenue.

“Now that the legislators have two plans to work with, let’s hope they find a compromise somewhere in the middle,” said James Hohman, the assistant director of fiscal policy with the Mackinac Center for Public Policy. “We really wouldn’t want to see them proposing another $2 billion tax hike.”

Under the Senate plan, the gas tax would go up from 19 cents a gallon to 24 cents on Oct. 1, and jump to 29 cents on Jan. 1, 2016; then a year later, on Jan. 1, 2017, it would increase to 34 cents a gallon. The diesel tax would increase in seven-cent jumps on the same schedule, going from the current 15-cents per gallon to 34-cents per gallon by Jan. 1, 2017.

This would make Michigan's levy on gasoline purchases the second highest in the country, and the third highest on diesel. The Senate Fiscal Agency estimates these increases would bring in $475 million next year, $733 million in 2017 and $822.1 million in 2018. After the phase-in period these taxes would then ratchet upward (only) with inflation.

The potential tax-cut aspect of the Senate plan would require the state income tax, which is currently 4.25 percent, to be decreased by a set amount if revenues flowing into the General Fund increase faster than inflation. Any tax cuts would be dependent on future legislatures not diverting revenue away from the General Fund (for instance, to the Budget Stabilization Fund), thereby avoiding the trigger and not cutting rates.

The other major part of the House plan allocates $350 million from the state General Fund next year and $700 million in following years. These amounts are less than official projections of state tax revenue growth in the next two years, so absent an economic downturn before then, they would not require cuts to other programs, but rather decreases in the rate of increase.

The Senate plan does not include the House provision that eliminates a 6-percent state boost to the federal earned income tax credit provided by Michigan taxpayers. Increasing this subsidy to low-income wage earners to 20 percent of the federal credit was one of the provisions of the failed Proposal 1. The Senate Fiscal Agency estimates that cutting the current state EITC supplement would make an additional $118 million available for roads next year.

Gilda Jacobs, CEO of the Michigan League for Public Policy, said neither the House or Senate plan is a good deal for low-income households.

"This is like Sophie's Choice," Jacobs said, referring to the novel in which a mother has to decide which of her two children would die. "Neither of these plans are good."

"I would like us to increase the pot of revenue in the state so we don’t hurt those who are vulnerable in the state," she said. "We need a sustainable revenue base for our roads going forward."

Both House and Senate plans impose an annual registration surtax on electric and hybrid cars — $100 on all-electric (battery) cars and $30 on gas/electric hybrids.

Both packages also include some changes to road contracting and other procedures, and consists of House bills 4609 to 4616, plus Senate Bill 414 with the Senate's income tax earmarks.

The Legislature is scheduled to return to Lansing on July 15. Speculation around the Capitol is that the two plans will be debated and discussed behind closed doors by legislative leaders and Gov. Rick Snyder's people during the interval.