Nick Krieger (@nckrieger):
In the wake of the voters’ overwhelming repudiation of Proposal 1 last Tuesday, nearly everyone in Lansing is talking about a “Plan B” to fix the roads. Some observers favor raising the gasoline tax only. Others have discussed borrowing against or raiding restricted funds such as the Catastrophic Claims Fund or the Natural Resources Trust Fund. Still others assert that the Legislature should focus exclusively on cuts to Michigan’s existing budget.
None of these plans, standing alone, is adequate. Without budget cuts or other new sources of revenue, the Legislature would be required to increase the gasoline tax by roughly 27 cents per gallon in order to generate the necessary funds. This drastic jump in the gasoline tax would be a distasteful option for many Michigan drivers. Further, most restricted funds are either off-limits to the Legislature (i.e., the Catastrophic Claims Fund) or simply too small to make any real difference (i.e., the Natural Resources Trust Fund). Lastly, because most nonessential state services have already been slashed, any across-the-board cuts in the state budget would almost certainly hurt schools, police and fire departments, and other important government services.
It is clear that any serious plan to fix Michigan’s crumbling roads and bridges must be a hybrid, incorporating multiple methods of raising revenue or saving money. But this does not necessarily mean that the Michigan Legislature will have to start from “square one” as some commentators have suggested. There is a way to generate about $1.2 billion per year for Michigan’s roads and bridges without making gasoline unaffordable, raiding the aforementioned restricted state funds, or requiring a costly statewide election to amend the Michigan Constitution.
If Proposal 1 had passed, the price of gasoline would have risen an estimated 5 to 10 cents per gallon. So, for starters, let’s increase the gasoline tax by 10 cents per gallon—a far more reasonable increase than the 27-cent hike needed to raise all required revenue without other new sources. This would take Michigan’s gasoline tax from the current rate of 19 cents per gallon to a new rate of 29 cents per gallon. Approximately 4.4 billion gallons of gasoline are sold in Michigan each year. So this 10-cent increase would generate an additional $440 million annually.
Next, consider this: While Michigan currently taxes gasoline at a rate of 19 cents per gallon, Michigan taxes diesel fuel at the lower rate of 15 cents per gallon. For years, many experts have argued that gasoline and diesel should be taxed at the same rate—a concept known as gasoline/diesel parity—especially considering that the heaviest trucks (which use diesel fuel) are most likely to damage our roads. Given the influence of the trucking lobby, the Legislature has thus far lacked the political will to implement parity in the taxation of gasoline and diesel. But perhaps the time has finally come. Indeed, Proposal 1 would have established parity in gasoline and diesel taxation, and the will of the Legislature appears to be shifting on this issue.
What if the Legislature raised the diesel tax from the current 15 cents per gallon to 29 cents per gallon—the same new rate that would apply to gasoline? Approximately 860 million gallons of undyed diesel fuel (i.e., diesel fuel for use in motor vehicles that travel on public roads) are sold in Michigan annually. Therefore, a 14-cent increase in the diesel tax would generate an additional $120.4 million per year.
Do you remember when Michigan had a 6 percent use tax on services? Think hard; it wasn’t that long ago. Of course, the tax lasted less than a day, so it’s easy to forget.
Facing a financial emergency and possible government shutdown, the Michigan Legislature narrowly passed House Bill 5198 of 2007 with bipartisan support, adding a new section 3d to the Use Tax Act and establishing a 6 percent use tax on several statutorily enumerated services. Under the terms of the bill, the new use tax on services went into effect at midnight on December 1, 2007. However, for reasons that are not relevant here, Governor Jennifer Granholm signed House Bill 5408 of 2007 that same afternoon, repealing the new use tax on services less than 24 hours after it had taken effect.
In reports prepared at the time, the Senate Fiscal Agency and House Fiscal Agency both estimated that the new use tax on services would generate an additional $751 million per year. According to the House Fiscal Agency, about two-thirds of the new revenue would have been attributable to “consulting, janitorial, landscaping, office administration, and other personal services.” Of this total amount, 4 percent ($501 million) would have gone to the General Fund, and 2 percent ($250 million) would have been constitutionally dedicated to the School Aid Fund (unlike the first 4 percent of sales-tax revenue, most of which is constitutionally earmarked for education and local government, the first 4 percent of use-tax revenue is not constitutionally earmarked). In other words, $501 million of this new use-tax revenue could have been spent entirely on roads and bridges if the Legislature had decided to allocate it for that purpose.
The Michigan Legislature should revisit this plan and implement a use tax on services consistent with the framework set forth in House Bill 5198 of 2007. Unlike an increase in the sales tax, which requires a constitutional amendment and statewide election (see Proposal 1), an expansion of the use tax to cover services could be accomplished legislatively without a vote of the people.
These three sources of revenue—an increased gasoline tax ($440 million), an increased diesel tax ($120.4 million), and the first 4 percent of a new use tax on services ($501 million)—would generate $1.06 billion in new revenue every year, all of which could be used for transportation purposes without the necessity of amending the state constitution or holding a statewide election. This would leave only $140 million for the Legislature to find in Michigan’s existing budget—a far cry better than the disastrous plans currently circulating in Lansing that would require $1.2 billion in cuts with no new revenue sources. What’s more, a new use tax on services would also generate an additional $250 million per year for the School Aid Fund, potentially freeing up General Fund dollars that would otherwise be allocated to schools or higher education.
Many of Michigan’s largest media outlets supported Proposal 1; some have now begun to blame the opponents of Proposal 1 for the condition of Michigan’s disintegrating roads. At least two reporters have recently alleged that the opponents of Proposal 1 purposefully spread misinformation about the ballot measure in an effort to confuse the voters and secure the proposal’s defeat. How sad it is that these individuals—who did not seem to fully understand the structure of Proposal 1 themselves—have taken to vilifying their fellow voters instead of putting forward road-funding ideas of their own.
The truth is that Proposal 1 represented an abdication of responsibility by Michigan’s lawmakers and would have made potentially dangerous amendments to the Michigan Constitution. Rather than putting more money into schools, for instance, Proposal 1 would have constitutionally deprioritized K-12 funding in the long term. The structure of Proposal 1, itself, was potentially unconstitutional as well. While these constitutional issues obviously escaped the attention of certain reporters, there were many legitimate reasons for Michiganians to vote “no” last Tuesday.
No one likes paying taxes. If the Legislature had comprehensively addressed the state of our aging infrastructure ten years ago, it might have been able to fund the needed repairs without raising additional revenue. But now many of Michigan’s roads and bridges have deteriorated so badly that they must be completely rebuilt. This will cost real money.
Make no mistake: The blame for this mess rests entirely with the Legislature. Michigan’s road-funding disaster is nothing new; our lawmakers have known about it for years. Yet instead of buckling down and fixing the problem while it was still manageable, the Legislature bickered, wasted time, and looked the other way as our roads continued to fall apart.
Now it is no longer a Republican or Democratic problem. Pro-tax and anti-tax lawmakers alike are feeling the heat from their constituents. People want the roads fixed; a solution must be found by the end of summer.
The Legislature has waited too long to solve the problem through budget cuts alone. At this point, there is no realistic option but to raise new revenue. As the defeat of Proposal 1 teaches us, however, new revenue must be raised responsibly—in a straightforward and transparent manner. To this end, the Legislature should increase the gasoline and diesel taxes to 29 cents per gallon and impose a 6 percent use tax on services consistent with the short-lived, former section 3d of the Use Tax Act. Although no tax increase is ever ideal, this solution will generate the necessary funds with the least amount of pain and allow Michigan road-construction projects to begin moving forward.