Proposal 1: Road fund vote to impact more than sales tax

Gary Heinlein
The Detroit News

Lansing — Tuesday's ballot measure seeking to increase road funding and the sales tax would trigger 10 new or amended laws — half dealing with road issues and the other half covering non-highway issues such as local government aid and tax relief for the working poor.

Proposal 1 supporters have emphasized that streamlining and reforming the complicated fuel tax system involved compromises to ensure residents could vote on whether to pump an extra $1.3 billion annually into fixing the state's deteriorating infrastructure.

The plan isn't perfect, they admit, but voter approval is the best hope for catching up on repairs of roads and crumbling bridges because the state transportation budget has been underfunded for at least a decade.

Some roads in Mayor Jack Kirksey's Livonia are in such sorry shape he jokes that "tanks rather than automobiles" should travel on them. He supports Proposal 1, which he said would help the Wayne County community address an immediate need to repave the broken-down portions of Seven Mile and Eight Mile that give motorists fits.

"I hope it will pass," said Kirksey, whose city would receive $1.4 million more in 2016 than it did in 2014 if Proposal 1 passes. "Any money that comes down the pike will be welcomed because there's a gigantic need for it. Our roads are in a deplorable condition."

Proponents start a three-day bus tour across the state Thursday, in hopes of mobilizing "yes" votes.

Opponents don't dispute that the highways and streets are in bad shape. But they say Proposal 1 raises taxes too much and grows the size of government by spending hundreds of millions of dollars on unrelated items. The plan also is needlessly complex, they say.

Voter approval would generate a total tax hike of $1.8 billion to $1.9 billion overall, including — eventually — the $1.3 billion more annually for road repairs.

The plan "has a lot of potholes and pitfalls," Republican Attorney General Bill Schuette said recently. "It's a massive, $1.9-billion sales tax increase that goes well beyond road funding. There's just too much under the tree."

Road financing shift

The plan eliminates the sales tax on gasoline and diesel fuel. That tax doesn't finance road repairs; it mostly goes to fund public schools and local governments. To make up the revenue loss for schools and communities if the tax is repealed, Proposal 1 would raise the state sales tax to 7 cents on the dollar. Since the state sales tax is constitutionally set at 6 percent, voters have to approve a constitutional amendment to change it.

As a result, all state revenue from future fuel taxes would be used for transportation — mostly road repairs, but with a smaller portion going to mass transit.

Starting the third year after approval, or the 2017-2018 budget year, there would be $1.3 billion more for state and local road repairs, according to estimates from the state House Fiscal Agency.

But in the first two years, $467.5 million of the new money must go toward debt payments on past road improvements. The result is the extra money for road repairs would be $367.8 million in 2015-16 and $763.6 million in 2016-17.

Supporters, including Gov. Rick Snyder, argue that paying off road debt frees up more transportation money in the future, to invest in road and bridge repairs.

Budget analysts say $765 million of the $1.3-billion increase would go to local roads and streets under a state law that gives 39.1 percent of state transportation revenues to counties and 21.8 percent to cities and villages. The state gets the other 39.1 percent.

Higher fuel taxes

Passage of the proposal would lead to a conversion of the 15-cents-per-gallon diesel tax and 19-cents-per-gallon gasoline levy to a new tax that is equal to 14.9 percent of the wholesale prices for both types of fuel.

At current prices, the new tax would amount to 41.7 cents a gallon for gasoline and 46.4 cents a gallon for diesel, according to the nonpartisan Citizens Research Council of Michigan. It would change because rates would be adjusted annually based on shifting wholesale fuel tax prices.

The Citizens Research Council says at a wholesale fuel price of $1.90 a gallon — about the current price — the new fuel tax rates would add 10.2 cents a gallon to what motorists pay at the pump.

The increase caused by the change, however, will actually go down when fuel prices go up. At a wholesale price of $2.50 a gallon, the increase would be 6.6 cents, CRC says.

The new fuel tax rate is based not on one day's price but averages across 12 months — which currently reach back to when prices were higher in 2014. So the increased cost to motorists could be as low as 3 cents a gallon, Snyder says, when the change kicks in.

The combination of state and federal taxes on fuel in Michigan, including the state sales tax on fuel, is 17th highest in the nation, according to the Citizens Research Council. If Prop 1 passes, Michigan would jump to seventh highest.

Higher registration fees

A smaller portion of the $1.3-billion increase in transportation revenue — about $200 million after five or 10 years — would come from vehicle registration fee changes. Most important for vehicle owners would be the elimination of the discount for the second through fourth years after new vehicles are purchased.

Right now, the registration fee drops in the second year to 90 percent of what it was on a new vehicle. It drops in years three and four to 84 percent and 73 percent of the original fee, after which it remains the same forever.

If the proposal passes, there no longer will be registration fee discounts, beginning with 2016 model-year vehicles. Fees on 2013, 2014 and 2015 vehicles will be frozen at their partly discounted rates. The fully discounted fees on 2012 and earlier vehicles wouldn't be affected.

The proposal also would lead to phased-in registration fee increases over a three-year period on large commercial trucks weighing more than 26,000 pounds in gross vehicle weight.

The annual registration fee for these trucks now ranges from $558 to $3,117. The registration fees would rise 12 percent March 1, 2016, a cumulative 24.1 percent by March 1, 2017 and a cumulative 36.1 percent by March 1, 2018.

The Citizens Research Council illustrates the effect using the example of a five-axle tractor-trailer registered at 80,000 pounds gross vehicle weight. Its current annual registration fee of $1,660 would rise to $1,860 in 2016, $2,060 in 2017 and $2,260 in 2018.

A surcharge would be added to vehicle registration fees for owners of electric-powered vehicles, starting Jan. 1. The surcharge, which would raise an estimated $637,000 annually, was added because advocates argued that electric vehicles are not contributing as much in road repair revenues as other motorists.

For vehicles powered "solely or predominantly by electricity" with an empty weight of up to 8,000 pounds, the surcharge would be $75, added to the regular registration fee. For heavier vehicles, the surcharge would be $200.

For hybrids "partially powered" by electricity with an empty weight of 8,000 pounds or less, the surcharge would be $25. For heavier vehicles in this category, the surcharge would be $100.

More money for education

While the sales tax increase was proposed to make sure schools didn't lose money over the elimination of the sales tax on fuel, it would result in extra money for public schools. The House Fiscal Agency says the tax increase would add $292.4 million to the state School Aid Fund in 2015-16, but the added amount would drop to $200 million in 2017-18. Michigan's School Aid Fund for the current budget year is $13.1 billion.

New provisions triggered by Proposal 1 would limit use of the fund to K-12 schools, community colleges and career technical education programs.

Some aid money recently has been diverted to state universities. Since the recession-era 2009-10 budget signed by then-Gov. Jennifer Granholm, the state has used at least $400 million annually from the School Aid Fund to help pay its allotment to community colleges and Michigan's 19 public universities, the Citizens Research Council notes.

Revenue sharing increase

The sales tax increase would mean $89.9 million more to be divvied up among cities, counties and townships to support services such as police and fire in 2015-16, the House Fiscal Agency projects. By 2017-18, the hike would be $111.1 million.

It represents a modest bump in money to cities, counties, townships and villages, whose leaders say their budgets have been strained by state revenue-sharing reductions during the state's decade-long recession. In the 2001-02 budget year, local governments got $1.3 billion, but it was down to $865 million a decade later.

In this state budget year, local governments receive $1.2 billion in state revenue sharing. While a portion of each year's allotment is decided by lawmakers, the Proposal 1 increase theoretically would restore it to the 2001-02 level.

Restored income tax credit

The sales tax hike also would create $260 million more for working poor recipients of the state's Earned Income Tax Credit in 2015-16. The amount available for that tax credit would increase to $269 million in 2017-18.

Some 780,500 Michigan families qualify for the tax credit, which this year goes to individuals earning less than $14,820 a year, and couples with three or more children with earnings lower than $53,267. The proposal would restore Michigan's Earned Income Tax Credit to 20 percent of the federal credit, up from the 6 percent to which it was cut in 2011 as part of Snyder's first budget-balancing effort as governor.

As a result of the reduction, the state tax credit received by qualified Michigan families dropped from an average of $446 in 2011 to $140 on 2013 income tax returns, according to the state.

Democrats insisted on restoring the credit to the pre-2011 level as part of the roads plan to offset the impact of the sales tax hike on low-income families.

Other provisions

■The plan would let Detroit spend 20 percent of its transportation revenue on public transit and earmark up to $3 million to repair areas where roads cross railroad lines.

■It would require road construction warranties on state and local repair projects costing more than $1 million.

■It would add $40 million in the state budget for at-risk schools for one year.

Staff Writer Leonard N. Fleming contributed.

Uneven impact

By one estimate, approval of the proposal would result in average tax increases totaling $545 a year for Michigan families.

But since the actual amount is tied to their spending and mostly would be paid through the penny-more-per-dollar higher sales tax on their purchases, the amount would vary quite widely.

The non-partisan, non-profit Institute on Taxation and Economic Policy estimates it would cost $24 more a year for families with incomes less than $20,000 a year, $267 more for families earning $40,000 to $94,000 annually, $497 to $697 for families with earnings between $100,0000 and $431,000.

Tax increases would be offset by savings from fewer repairs of tires, rims, shock absorbers and other parts damaged when vehicles run across jarring potholes.

TRIP, a national transportation group that monitors roads and repairs, says it's costing Michiganians an average of $686 annually per motorist to fix pothole-related damage and pay higher auto insurance premiums.