One Republican idea to help counties and larger cities in Michigan pay for local road repairs: allowing them to levy their own gas taxes and vehicle registration fees.
The concept is among several floating around Lansing this summer as GOP legislative leaders say they continue to work on a plan to fix Michigan’s crumbling roads and bridges — an estimated $2.5 billion problem for which a solution remains elusive.
Leaders of the GOP-led House and Senate have not shared specifics of the ideas they intend to propose as part of a road-funding plan to counter Democratic Gov. Gretchen Whitmer’s proposed 45-cent gas tax increase. The Legislature recessed for the summer in June without completing a 2020 budget or roads deal; the state’s new fiscal year starts Oct. 1.
Republicans’ central dilemma: how to raise the roughly $2.5 billion a year needed for road repairs while avoiding — or, at least, limiting — tax increases that are anathema to the party and much of its political base?
House Speaker Lee Chatfield and Senate Majority Leader Mike Shirkey say talks continue on the contours of a GOP response as Lansing seeks to finalize state budget negotiations. Meanwhile, other road-funding ideas are circulating as lawmakers talk to constituents in their districts.
Among the ideas in the mix:
- A group of conservative West Michigan business leaders want the state to issue bonds to shore up Michigan’s underfunded teacher pension system, which in turn would free up money for K-12 schools to replace lost sales tax revenue under a House proposal to exempt gasoline from Michigan’s 6 percent sales tax.
- Giving local governments more flexibility to address their high-priority local streets, including the ability to charge new local taxes or fees.
- Promoting the use of more innovative materials or methods to build roads.
Many of the ideas don’t target ways for the state to raise additional revenue to meet the roughly $2.5 billion goal independent experts have said is needed to get state and local roads into good shape. Rather, they focus on other policy changes that aim to address how roads are built, or how local governments could raise additional money.
The closest the Legislature has come to publicly countering Whitmer’s gas-tax proposal is the House’s proposal to phase out the sales tax paid on gasoline and replace it with an equal amount of fuel tax, to raise an estimated $850 million.
Whitmer, who publicly rejected the pension bond idea, is still promoting her budget proposal across the state and calling out Republican legislative leaders for failing to finish a roads deal before breaking for the summer.
“Any solution that doesn’t educate our children and fix the roads isn’t a real solution. We have to do both,” Whitmer spokeswoman Tiffany Brown told Bridge. “The governor remains open to hearing alternative viable solutions, as long as those solutions can fix the real issues that Michiganders are facing.”
Yet some GOP lawmakers say a roads plan that aims to improve the quality of roads and bridges must also address the way roads are built.
“A budget is a budget, and it’s important,” said state Republican Rep. Jack O’Malley from Lake Ann, who leads the House transportation policy committee. “But if you want to do this right, you need to have good policy and reforms to go along with that budget.”
Local taxes
O’Malley, a first-term lawmaker, said he has pitched about 15 ideas at town hall meetings with constituents, all of which came out of transportation committee hearings this spring that he called “road-building 101.”
They include giving counties and some larger cities the option to levy local gas taxes, possibly up to a nickel, and vehicle registration fees, something O’Malley said would be a “huge” boost for communities struggling to afford to fix their worst roads.
The local taxes would come on top of the state and federal gas tax drivers already pay, as well as state fees to register vehicles that are collected annually.
Michigan is one of the most restrictive states when it comes to giving local governments the option to levy their own taxes, according to the nonpartisan Citizens Research Council of Michigan. Currently, property tax is its primary funding source, though it has proven to be problematic during the past decade because property values have not rebounded as fast as they collapsed during the Great Recession, limiting how much revenue communities can collect.
Just 11 states authorize the collection of local gas taxes, though 33 states — excluding Michigan — allow local governments to charge their vehicle registration fees, according to Citizen Research Council data.
Michigan tried local vehicle registration fees in the late 1980s and early 1990s, though local votes failed in a handful of counties in part because a per-vehicle fee of $25 was paid by all drivers, regardless of the value of their car, according to the Citizens Research Council. State registration fees are based in part on the value of the vehicle.
Michigan also is one of just nine states that don’t allow local governments to collect local sales taxes, the group’s data show.
“Michigan stands out as the exception” in authorizing so few local taxes, said Eric Lupher, president of the Citizens Research Council of Michigan, who presented on local tax options to O’Malley’s committee in May. “Diversifying these other options could take pressure off the property tax.”
Lupher added that local fuel or sales taxes also would allow visitors to contribute to a local government’s revenue, especially in communities that rely on a tourism economy, Lupher said.
“We don’t advocate and we don’t lobby, but I did bring it up before the committee for a reason — to introduce that idea that there are other ways of doing this,” he said.
Groups that represent cities and counties told Bridge they generally support the idea of new local taxes, though they said any local taxes should not replace revenue that is shared from the state.
Also, without seeing a formal roads proposal, local government groups say they have questions about how local gas taxes or registration fees would be collected.
For instance: Would revenue be dedicated strictly to roads? How would it be distributed? Would the money remain in the county or city in which it’s generated? Would the state collect it and disperse it to local governments, or could local governments collect it directly?
“We’re really willing to consider pretty much anything that they’re throwing out there,” said Deena Bosworth, governmental affairs director for the Michigan Association of Counties.
“Our reliance on property tax revenue is really, really hurting local units of government,” Bosworth added. “Any additional options to raise revenue at the local level is obviously something that we would love to have further conversation about.”
Lupher said the Citizens Research Council’s data point to other states Michigan could look to as examples of how to administer local taxes.
O’Malley said he also is trying to generate support for ideas that include giving counties and cities more flexibility in state law to prioritize their worst roads, regardless of whether they’re major roads or neighborhood streets, and to encourage the Michigan Department of Transportation to consider new materials or road construction methods.
“I don’t know how many of these are going to make it through to the final idea that they present to the governor, but they’re out there, they’re on the table,” O’Malley said. “What we got from that committee is more thoughtful than the governor’s idea, and when we’re out and about, people can hear that, hey, we’re trying to spend your money smarter.”
Gideon D’Assandro, a spokesman for Chatfield, told Bridge that while O’Malley’s committee has “a lot of options for smarter long-term planning,” none of them are final.
Whitmer’s office did not specifically address whether she supports the idea of local taxes.
Pension bond proposal
Earlier this year, Chatfield, R-Levering, and Shirkey, R-Clarklake, asked the West Michigan Policy Forum, a group of Grand Rapids-area business leaders, for ideas about how to increase road funding, Jase Bolger, a former Michigan House speaker and now the West Michigan group’s policy adviser, told Bridge.
The result: a proposal to sell bonds to infuse $10 billion into the Michigan Public School Employees’ Retirement System. Bolger said the group’s estimates show that would free up close to $980 million per year in the School Aid Fund that won’t be needed for annual pension payments and instead could be used to replace the lost revenue should the sales tax be eliminated from gasoline.
Michigan’s teacher pension system had slightly more than $50 billion in assets as of Sept. 30, when the state’s last fiscal year ended, according to its 2018 annual report. But the pension system has an unfunded liability of $32.7 billion, the amount it owes future pensioners but has not yet set aside.
The West Michigan Policy Forum, and Republican legislators, have focused in recent years on reforming the state’s pension systems to address funding gaps. Pensions are constitutionally protected, meaning the benefits are required to be paid once an employee retires.
The group’s proposal would lock in a 30-year repayment schedule, stretching out the date when the teacher pension system would expect to be fully funded for another 10 years beyond 2038, the year then-Republican Gov. Rick Snyder said Michigan’s pension systems should be fully funded.
In 2017, Snyder signed legislation to direct new school employees into retirement accounts that resemble a 401(k) savings plan, rather than a hybrid option that also includes pension benefits.
A longer repayment period would shrink the state’s annual payments, since the state would be able to spread the total dollar amount needed over more years, Bolger said. The $10 billion would be invested over time, assuming a 4 percent interest rate and a 6 percent return on investment.
Shirkey recently told Crain’s Detroit Business that he supports the business group’s idea and planned to incorporate it into the Senate’s proposal to Whitmer.
His spokeswoman, Amber McCann, told Bridge “it is true he is personally supportive of the concept presented by the West Michigan Policy Forum,” though Senate Republicans have “not yet reached a consensus on how to direct more dollars toward roads.”
D’Assandro declined to say whether Chatfield supports the idea, but added that all options are on the table.
The idea has gotten pushback, both in Michigan and nationally. The Government Finance Officers Association, which represents public finance administrators in the U.S. and Canada, in 2015 issued guidance against using pension obligation bonds.
The Chicago-based association maintains the bonds carry significant risk, from market returns falling short of expectations to government taking on more debt.
Patrick Anderson, an East Lansing economist who previously served in Republican Gov. John Engler’s administration, called the plan “an age-old temptation” that ultimately won’t save Michigan taxpayers money.
“Prudent homeowners don’t take second and third mortgages out to speculate in the stock market, and prudent taxpayers don’t want their governments doing the equivalent,” Anderson said.
“Borrowing more money puts you deeper into the hole,” he added. “It doesn’t generate savings.”
Bolger countered that pension bonds are an investment tool that can work, provided that governments use conservative estimates for the size of the investment return they’re likely to earn.
