Transportation funding: Here's what Proposal 1 does (and why it's good for Michigan)

Editor's note: This is the second in an occasional series on transportation funding leading up to the May 5 special election. Read part one here.

In our first post in this series, we explored the factors-changing driving habits, fuel taxes not keeping pace with inflation, more fuel-efficient vehicles-that have left Michigan and other states hurting for dollars to maintain transportation infrastructure.

In this post we'll dive into what Proposal 1 would do to begin addressing that shortfall. We'll warn you right now, folks: This is gonna get pretty wonky. But we think it's important that voters really understand what's on the ballot in May, so we'll do our best to be both thorough and readable.

First, we need to understand how we currently fund Michigan's transportation system. And as you'll see, for all the talk by its opponents of how "complicated" Proposal 1 is, it's not as if our current system is the model of elegance.

How transportation funding works today

The bulk of our transportation dollars comes in roughly equal proportion from two main sources: First, there's the motor fuel excise tax-19 cents per gallon on gasoline and 15 cents per gallon on diesel-that we all pay at the fuel pump. Second, there's the vehicle registration fees we pay at the Secretary of State's office. The motor fuel excise tax is a flat tax, meaning that it does not react to price inflation-we pay the same amount whether gas costs $1.50 or $3.50.

About half of our transportation funding comes from the federal government. In recent years our transportation shortfall has been so significant that we've had to tap Michigan's general fund-basically the state's main checking account-just to meet the match required to be eligible for those federal funds. That money all pours into the Michigan Transportation Fund, the bulk of which pays for roads and bridges. The transportation fund also supports public transit and directs money to the Recreation Improvement Fund, which supports trails, waterways and other outdoor amenities that make Michigan a great place to visit and explore. We currently pay a 6 percent sales tax on gasoline. That revenue is divided four ways. It supports public education through the School Aid Fund. It helps local governments pay for basic services like police and fire protection. A small portion helps fund Michigan's 78 public transit agencies, which in 2013 gave Michiganders a lift more than 95 million times. After schools, locals and transit have received their allotted percentage, the balance goes to the general fund.

What would change under Proposal 1

The ballot proposal would eliminate the sales tax on fuel. It would replace that revenue by raising Michigan's overall sales tax from 6 percent to 7 percent to support schools, local governments and the general fund.

Approval of Proposal 1 also will put into effect related bills that would:

• Exempt motor fuel sales from the general sales tax.
• Convert the tax on motor fuels from an excise tax to a wholesale tax that increases incrementally over the next several years. That change means we'll pay fuel taxes based on a percentage of each sale instead of a flat amount that ignores changing prices. In other words, the tax we pay will adjust to changing fuel prices, helping to solve one of the problems that led us to our funding shortfall.
• Increase the Earned Income Tax Credit from 6 percent to 20 percent of the federal credit. That's an important measure to protect lower-income residents from the increased sales tax, which tends to hit people harder the less money they make.
• Eliminate the depreciation of ad valorem tax rates for passenger vehicles. Here's how a human might say that: Currently, the tax you pay on vehicle registration decreases each year as your car loses value. The ballot proposal will keep the registration tax at the same rate as when you purchased the vehicle. It also will create a new registration tax surcharge for electric-powered vehicles and increase registration taxes for trucks over 26,000 pounds, which would be phased in over three years beginning March 1, 2016.
• Establish new requirements related to road construction warranties and related reporting requirements for the department and local road agencies. This helps us make sure we are getting the best bang for our road-funding bucks and adds accountability to ensure that all contracted state transportation work stands up to high quality standards. This bill also allows cities that meet specific criteria to use a larger portion of their state road funding for public transit if they choose to.

How Michigan would benefit from Proposal 1

Now let's look at where the new revenue will go. It's important that we clear this up, because opponents of the ballot proposal are trying to mislead the public about who benefits from a "yes" vote.

You may have seen a TV ad claiming that "nearly 40 percent of goes to special interests." Just what are those special interests? They are the public schools your kids go to, your local fire department, the people who make sure you have clean drinking water, the bus services that get you or your neighbors to the doctor's office, and other essential services. To call public safety and our children's education "special interests" is not just incorrect, it's insulting.

The TV ad is also flat-wrong in claiming that Proposal 1 would give Michigan "one of the highest sales taxes in the nation." In fact, a 7 percent sales tax would put us at number 21 in the country, according to the Tax Foundation.

Now, here's a breakdown of where the new funding would be put to use. Note that the numbers in bold represent the increase in annual funding for each category, based on projections for the 2017-2018 fiscal year. (We got the following figures from this document.)

Roads: + $1.3 billion

Proposal 1 does have a lot of moving parts, but it ultimately simplifies the way we pay for transportation itself. It guarantees that every penny in state taxes we pay at the pump is used to support transportation.

In the first two years of the proposal's implementation, a portion of the new revenue would pay down transportation-related debt. After that, state and county road agencies would each get about 40 percent of the revenue, with the remainder going to cities and villages.

School Aid Fund: + $200 million

The proposal also guarantees that every penny of the School Aid Fund supports K-12 education and community colleges. It would provide schools with an additional $292 million in the first year the plan is implemented, and level off to $200 million a year beginning in fiscal year 2018.

If Proposal 1 does not pass, schools not only won't get more money, but will likely lose money as more general fund dollars are diverted to help make up for the shortfall in transportation funding. It's also worth noting that better roads will help schools save additional money by reducing maintenance costs for their bus fleets.

Public transit and passenger rail: + $116 million

We've said it here before, but it bears repeating: Public transit in Michigan has not seen a structural funding increase since 1987. (By structural increase, we mean an increased slice of the pie. Transit may have seen overall increases in some years, but only because the pie itself grew, due to more fuel purchased or other factors.)

Much of the new funding for public transit and passenger rail would go to support local bus operating budgets. This includes services like the Benzie Bus in northern Michigan, which primarily helps seniors and individuals with disabilities get to the doctor's office, the grocery store, visits with family and other day-to-day needs. Urban systems would also see a boost, including bus service in Metro Detroit, which in recent weeks has gained national attention as the Detroit Free Press has turned the story of one man's incredible daily commute on foot into an insightful series on the region's broken transit system.

(Our next post in this blog series will take a deeper look at why new funding for transit is so critical for Michigan's future.)

Local governments: + $111 million

Proposal 1 would substantially increase revenue sharing to local governments. That funding-combined with additional state road aid that should ease pressure for local road spending-will provide more opportunity to fund local services and amenities. This includes basic services like fire protection and utilities, along with the family-friendly parks, scenic recreation trails and walkable commercial districts that help make our communities great places to live, work and play.

Recreation Improvement Fund: + $20 million

The Recreation Improvement fund helps the Department of Natural Resources fund many transportation-related amenities that help make those Pure Michigan commercials ring true. The $20 million boost will help maintain and improve our miles of scenic trails, as well as support the harbors, marinas and public boat launches that pump $3.6 billion into the state economy annually and are responsible for 50,000 jobs.

You did it!

Congratulations-you made it through the blog equivalent of a whole can of spinach! Now you probably know more about Michigan transportation funding than you ever wanted to. Take a minute to enjoy the special high-five below. You've earned it.

These details are important in combating misinformation campaigns about Proposal 1, but they're only part of why MEC is supporting the ballot measure. That's why our final post in this series will look beyond the facts and figures and explore our vision of the 21^st-century transportation system that a "yes" vote on Proposal 1 will help build. We'll highlight some exciting projects on the horizon and make the case for modern transportation as a powerful tool for attracting talent, growing our economy and creating a higher quality of life in Michigan.

Thanks for reading!

-Written by Liz Treutel and Andy McGlashen. Graphics by Liz Treutel

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