by Robert Kleine, Senior Economist, and Brent McIntosh, Research Assistant
|This paper examines trends in Michigan transportation revenue from 1982 to the present–with particular attention to the motor fuel taxes, compares Michigan with other states, and suggests changes to resolve funding problems and help keep Michigan’s economy on the move.|
There can be no question that the condition of a state’s road system has wide-ranging effects. The questions involved range from the seemingly trivial (Can we take a Sunday drive?) to the economically critical (Can Michigan continue to thrive despite aging roads and bridges?). The answer to these questions and others ultimately is money—funding for the state’s transportation infrastructure. Falling motor fuel revenue is a factor in the declining quality and growing congestion of Michigan’s roadways, in part because the revenue no longer is sufficient to pay for capital outlay and maintenance. If Michigan is to continue to prosper, the revenue that supports our transportation infrastructure must be carefully evaluated as to fairness and adequacy and changes made to correct deficiencies.
Among the many effects roadways have on daily life, the link between transportation infrastructure and economic growth stands out. Corporations often base location decisions on the adequacy of local public infrastructure. In fact, a Census Bureau study of foreign companies looking to invest in the United States finds that this factor dominates such decisions, having even more weight than the availability of technical training for workers. In part, this is because the quality of the local transportation infrastructure often affects the productivity of a company, especially those that are production centered—that is, their business depends on safe and rapid delivery of goods. Good road systems enhance productivity, which leads to private investment, which fosters economic growth.
The economy’s gradual shift toward a more service-based orientation does not reduce the importance of transportation infrastructure. Business and industry location decisions also frequently are greatly influenced by “quality of life” considerations, and highway systems are a fundamental determinant of quality of life for most workers—well-maintained and uncrowded roads make a region a more attractive place in which to live and work. Yet a 1994 Automobile Association of Michigan member survey, as reported in the Detroit News, revealed that two-thirds of the respondents rate Michigan roads as fair or poor.
By affecting business productivity and residents’ quality of life, Michigan roadways directly influence the economic development of the state. Unfortunately, Michigan roads and bridges have aged significantly, and highway use is up, but the revenues available to maintain the road system have not kept pace. Repairs are needed, and soon, since their cost increases geometrically with highway use. Funds also are needed to expand the system, to reduce growing congestion.
The revenue to support Michigan’s highway system comes from three major sources: the federal government, state car and truck registration, and state motor fuel (gasoline and diesel) taxes.
Federal Transportation Support
As a share of total revenue, the transportation money that states receive from Washington has increased in recent years (see Exhibit 1); unfortunately, the federal government probably will not be able to continue to contribute all it has promised to the states. Because of federal budget reductions and onerous regulations for allocating funds, in the future federal funds are likely to decline as a share of state transportation revenue.
State Registration Fees
Car and truck registration fees have become more important to Michigan since 1982 (see Exhibit 2), due partially to legislated fee increases in that year and in 1987. The average collection per passenger vehicle has nearly doubled since 1982, easily out pacing inflation, and Michigan registration receipts total $1,500 per mile more than the median for all states.
State Gasoline and Diesel Taxes
Motor fuel taxes are Michigan’s largest source of transportation revenue, but they have declined in importance in the last decade. Since 1984 the gasoline tax has been 15 cents a gallon, following two-cent hikes in 1983 and 1984; these increases were imposed to counter the falling gasoline consumption (and thus state revenue) brought on in part by the high prices engendered by the OPEC oil crisis. Since 1984 the legislature has hesitated to further raise the levy.
Other states have not been so reluctant. Tight budgets and sluggish fuel tax revenue growth have compelled other states to boost their motor fuel tax rates; the U.S. Department of Transportation (USDOT) reports that every state save Alaska and Georgia has raised its fuel tax rate in the years since 1982. And since 1984, when Michigan last raised its tax, all but five states have hiked their rates. When Michigan legislators chose to raise the per-gallon tax from 11 cents to 15 cents over two years, the median among states increased from 10 cents to 12 cents a gallon. In 1993, however, Michigan was no longer on the high end of the spectrum: the national median rate had climbed to nearly 19 cents, significantly higher than Michigan’s (see Exhibit 3).
Opponents to raising the Michigan fuel taxes point out that this state is one of only a few that charge sales tax on motor fuel. Although it is true that only nine states impose the extra tax, many others levy special fees or allow local fuel taxes; moreover, the great majority of Michigan sales tax monies go to finance education, not to construct or maintain transportation infrastructure.
The 15-cent-a-gallon tax rate for gasoline is also the rate specified for diesel fuel. However, only a small percentage of diesel purchases are taxed at that rate, because 1980 legislation grants most motor carriers a six-cent-per-gallon discount. The law was enacted to keep Michigan diesel retailers competitive with those in bordering states, where rates were lower. Since 1980, however, Illinois, Indiana, and Ohio have raised their rates, and they now surpass even the 15-cent levy that Michigan could collect if the discount were not in effect. Today, the effect of the discount means that the largest consumers of diesel fuel in Michigan pay only nine cents a gallon; as a result, the state’s diesel tax rate averages about ten cents per gallon, an effective rate lower than in 46 other states.
Michigan Transportation Fund Revenues
The motor fuel tax and registration revenues are deposited in the Michigan Transportation Fund (MTF) and distributed by a formula set by the legislature. Over the last decade the static nature of the fuel tax rates has forced their portion of fund revenues into steady decline, dwindling from more than 67 percent (in 1983–84) to 56 percent (in 1993–94). While in the same period nominal revenues climbed from $571 million to more than $729 million, due to higher fuel use, the figures are not adjusted for inflation, as are the figures in Exhibit 2. When deflated, using the U.S. Consumer Price Index (CPI), real revenues from motor fuel taxation have dropped—from $573 million in (1983–84) and a peak of $600 million (in 1987–88) to less than $505 million (in 1993–94). Essentially, what has happened is that while the nominal gasoline tax rate has remained at 15 cents per gallon, inflation has forced the real tax rate to just over 10 cents a gallon (in 1983 dollars). While motor vehicle registration revenue has climbed, it has not been sufficient to counter the fall in gasoline tax revenue. As a result, real MTF revenues were $895 million in 1993–94, down 7 percent from their 1988–89 high. This decline directly affects the quantity and quality of roadway maintenance and construction.
Had the legislature allowed the fuel taxes to be indexed (tied) to the cost of highway maintenance, as measured by the now-discontinued Federal Highway Association (FHWA) Maintenance Cost Index, 1 the 1994 tax would have been about 18.7 cents per gallon, almost exactly the national median. Indexing would have brought in $1.4 billion more in gasoline tax revenue than was raised in the last decade, and the revenue foregone by allowing the diesel fuel discount would have added another $120 million; from 1984 to 1993 the combined loss to Michigan’s highway system has been more than $1.5 billion (see Exhibit 4). Had the rate increases been capped at two cents per year, the added revenues still would have been over $1.3 billion. The revenue probably would have been slightly less than projected here, because motorists would have used less fuel if it had been more expensive, but because motor fuel’s price elasticity is generally accepted to be less than one—that is, an increase in the price of gasoline brings a less-than-proportional drop in usage—the decline in consumption would have been modest.
Michigan Versus Other States
Comparisons with other states provide clear evidence of Michigan’s need for additional revenue. USDOT figures show that Michigan’s principal arterial roads are not only more crowded than in 1982, but they also are significantly more congested than in most other states. Michigan’s roadways need repair and expansion, but the state ranks 38th in maintenance spending per mile of roadway and 34th in capital outlay spending per mile (see Exhibit 5). Expenditures on capital improvements totaled only $4,724 per mile of Michigan road in 1993, the least of the five Great Lakes states. Exhibit 6 shows that at only $203 per person, Michigan FY 1992–93 state and local direct spending per capita on highways was second lowest in the United States—$84 below the median; only South Carolina was lower.
Michigan’s relatively low transportation expenditures stem from two circumstances: below-par federal aid and below-par state transportation revenue. Although in 1993 Michigan was among the top quarter of states in terms of total federal aid, when the data are adjusted for population Michigan fares less well: only New York and Florida received less aid per capita (see Exhibit 7). Even in terms of dollars per mile of road, in which Michigan ranks 24th, the state received over $2,000 less per mile than the national average. Neither are revenues raised in state on a par with those of other states, partly because Michigan depends less than most states on local revenue to fund transportation infrastructure. Fuel tax revenue in Michigan for 1993 ranked 45th in the country, generating only $77 per person, while 36 states collected more than $100 for every resident (see Exhibit 8). When the latter statistic is adjusted to reflect the wealth of the states as measured by fuel tax revenue as a percentage of personal income, Michigan’s rank climbs only one position. Transportation revenues and expenditures in Michigan are far below those of many states, and relief from the federal government is unlikely. If the state’s local- and state-generated revenues do not make up the difference, Michigan’s road system will continue to deteriorate.
State Tax Limit
Article IX, Section 26 of the Michigan Constitution limits the revenue that the state may raise in any year to 9.49 percent of Michigan personal income, and any additional transportation revenues will count against this limit. Revenue for FY 1994–95 may exceed the limit, although not by an amount large enough (more than one percent) to require a refund to taxpayers. However, our estimate is that state revenue will fall nearly $1 billion below the limit in FY 1995–96 and about $1.2 billion below in FY 1996–97, leaving plenty of room for an increase in transportation tax revenue. Because state tax revenue, on average, grows more slowly than does personal income, it is unlikely that revenue will exceed the limit in the foreseeable future, unless other taxes also are increased.
Possible Courses of Action
To avoid even higher future costs of repairing the state’s roadways and to prepare for the increasing number of vehicles that use Michigan roads each year, the state must increase revenues earmarked for transportation infrastructure. This will be crucial both to maintaining the recent progress of Michigan’s economy and to keeping the state on course for long-term prosperity. To further these goals, the following are possible courses of action for the state legislature and the governor.
Raise Motor Fuel Taxes at Least Five Cents
A five-cent-per-gallon tax increase will generate more than $250 million annually, which is needed to compensate for revenue shortfall over the past decade. This amount also will put Michigan’s gasoline and diesel tax rates near those in most states and raise transportation revenues to the level adequate to maintain and improve the state’s infrastructure. A case can be made for a larger increase, but there seems to be little political support for more than seven cents per gallon.
Index Motor Fuel Rates to Highway Maintenance Costs
Besides the obvious effect of generating the revenue essential to maintain Michigan roadways, indexing the rates to repair costs has another, less obvious consequence: it makes motor fuel taxes akin to road user fees, making people realize that they pay for the maintenance and expansion that their road use necessitates. A user fee likely is more politically palatable than other revenue-generating measures, because drivers will clearly understand that their money is going for their direct benefit.
Since the FHWA no longer produces the maintenance cost index, another appropriate index is needed, one obviously linked to Michigan roads. One suitable candidate is the Detroit–Ann Arbor CPI, which in the past has shown growth paralleling that of maintenance costs and is Michigan-specific. Using it will enable the state to gain a large portion of the funds needed to repair and improve its roadways.
Eliminate the Motor Carrier Diesel Discount
The diesel tax discount was justified at its inception—it helped to keep Michigan diesel retailers competitive, but today it gives them a windfall enjoyed by no other business: They can charge half, or even a third, less tax than many of their neighbors across the border. Some of the gain to the state from discontinuing the discount would be offset by the loss of licensing fees that permit motor carriers to pay the lower rate, but in the end the change would lead to greater total transportation revenue. Trucks inflict major wear on roads and bridges, and requiring them to pay the full motor fuel tax will help generate revenue to pay for repairs. This change would raise about $15 million annually.
This paper presents three major courses of action to rectify Michigan’s highway infrastructure problems; there are several other ways to cut costs and generate new funding, such as equalizing or increasing registration fees, eliminating the fuel shrinkage allowance (the flat 2 percent reduction allowed fuel retailers, to account for evaporation) and increasing driver’s-license fees. Regardless of the approach used, a substantial increase in transportation is vital to maintaining and improving Michigan’s transportation infrastructure, a critical step for the state as it moves into the next century.