Michigan trade and civic groups ramp up warnings on road funding

Michigan falls $3.9 billion short annually of what it needs just to maintain the condition of its roadways, according to a report that serves as launching pad for a coalition pressing for a long-term fix that will require new or higher taxes.

The projection comes from an analysis of the cost of meeting state road condition goals and incorporates the remaining funding from the state’s ongoing $3.5 billion 2020 Rebuilding Michigan Program and $7.3 billion of formula funding from the Infrastructure Investment and Jobs Act.

“The report makes it crystal clear that it’s time to take funding our infrastructure seriously,” said Rob Coppersmith, executive vice president at the Michigan Infrastructure and Transportation Association, which commissioned the report from the nonpartisan public policy consulting firm Public Sector Consultants.

MITA, a trade group that represents the road construction industry, presented its findings last week to the state House Transportation, Mobility and Infrastructure Committee after a news conference alongside other trade, business, and civic groups including the Michigan Municipal League.

Maintenance of the existing road network carries a $9 billion annual price tag and without a steady uptick in funding limited or deferred maintenance could push the annual bill to $16.7 billion. Last year more than 42% lane miles were rated in poor condition and without more funding that number will rise to nearly 50% by 2031.

State transportation funds are generated through three main streams: taxes on gasoline and other petroleum products, vehicle registration fees, and general fund money.

The 2019 bond program and the federal IIJA represent new infusions and are providing about $5.4 billion in fiscal 2023 alone. Combined sources fall below $5 billion in fiscal 2024.

State road spending is benefiting from supplemental funding in the fiscal 2023 budget that raised DOT’s budget to $6 billion from $5.4 billion. The bipartisan Building Michigan Together Plan signed last year also directs $5 billion of one-time investment in transportation, water, and high-speed internet infrastructure projects, and other areas.

The proposed fiscal 2024 budget directs hundreds of millions for a one-time infusion of infrastructure money designed to allow the state to leverage federal infrastructure funding.

Backers of a long-term fix caution that the budget state measures represent one-time injections of funding and come during a time of surpluses.

The report lays out a series of options to raise funding levels without endorsing any single source or plan.

Option one would raise the current motor fuel tax of 28.6 cents per gallon. The proposed tax rate increases range from 39 cents per gallon, which meets Michigan DOT estimates, to 74 cents to meet Public Sector Consultants’ modeled estimates for different pavement life cycle maintenance levels.

Option two would also lift the motor fuel tax and assess the motor fuel tax on a per dollar, instead of per gallon, basis. This increases revenue during times of higher gas prices, but similarly decreases revenue during price downturns. Other states have moved away from this approach due to its volatility, the report noted.

On average, state motor fuel taxes account for about 40% of Michigan Transportation Fund revenue, its largest single source.

Option three would raise the state sales tax by 2% to 3%to provide a dedicated revenue stream. The option faces a steep hurdle in that it would require an amendment to the state constitution.

Option four would allow local communities to pursue sales tax increases, an option not currently available. The change could be pursued through a constitutional amendment.

Option five would generate revenue based on the miles traveled on Michigan roads; a tax between $0.03 and $0.05 per mile traveled would be necessary to meet the funding gap.

“Different states and countries have explored this approach in different ways, and the federal government is currently providing funding to pilot this model,” the report noted.

The right wing Mackinac Center for Public Policy think tank and Reason Foundation released a study in 2022 that warned of falling revenue and proposed replacing gas taxes with mileage-based user fees.

MITA’s new report looks at 83,030 lane miles of federal-aid roads and 165,000 lane miles of local county roads.

The report serves as a base for a Fix MI Coalition MITA is putting together to tap business, labor, tourism, agriculture, transportation, manufacturing and other industries to press for a long-term fix.

The report didn’t recommend one option over another the coalition members stressed that there’s not likely a single fix but a combination that requires debate.

The group also said a recent tolling study deserves consideration. Michigan lawmakers in January received a report laying out options for a first-time road tolling program that would establish a public tolling agency and new borrowing credit to shore up a long-struggling road funding system.

“We have to put all the cards on the table and find out what’s palatable to the people of the state of Michigan, the legislature, and the business community,” Coppersmith said. “There’s no silver bullet on this.”

Michigan raised the gas tax in 2017 for both gas and diesel to 26 cents per gallon. On January 1, 2022, the motor fuel tax increased to 27.2 cents per gallon due to an inflationary trigger built into the law.

Gov. Gretchen Whitmer, a Democrat, turned to the motor fuel tax as a fix with her proposal to hike the tax by 45 cents on a pledge to “Fix the Damn Roads” but the GOP legislative majority at the time killed it and she turned to the $3.5 billion bonding program.

Whitmer won reelection in a November election that put her fellow Democrats in control of the legislature.

She has said finding a long-term funding strategy for transportation is a top priority.

Whitmer has taken a gas tax off the table and said in post-election interviews a funding revamp must take into account falling gasoline based tax revenue as the use of electric vehicles grows.

MDOT has another $1.9 billion of trunk line road bonds to sell under the $3.5 billion program after delaying their sale in the fall amid project cost changes and other pressures.

Patrick McCarthy, director of the DOT Bureau of Finance and Administration, said in an email Tuesday there’s no update on timing.  

Inflation has driven up the cost of infrastructure projects and the cost of borrowing has risen amid the Federal Reserve‘s rate hikes.

The trunk line bonds are secured by a first lien on constitutionally restricted revenues that come from motor fuel taxes, vehicle registration fees, and other transportation-related miscellaneous fees that are deposited into the State Trunk Line Fund.

The department launched the program in 2020, selling the first $800 million  followed by another $800 million sale in 2021. The bonds carry ratings of Aa2 from Moody’s and AA-plus from S&P Global Ratings.

The proposed toll program, which would begin with nearly 600 of mostly interstate miles, would be somewhat unusual in that it would be implemented on existing roads. Most new toll programs are established on new roads, with less than 1% of toll mileage built on so-called brownfield roads.

“As we’re looking for new revenue streams, this would be a novel concept,” Eric Morris, Michigan office leader at transportation advisor HNTB, told lawmakers on the Senate Transportation and Infrastructure Committee hearing in February.

The Michigan DOT hired HNTB to undertake a feasibility analysis and implementation plan for tolling across the state. Whitmer has said she is open to the idea of tolling.

Toll revenue on the first corridor would gross around $1.3 billion in 2032 and rise to $4.5 billion in 2067, with a total gross revenue estimate of $43.7 billion in 2022 dollars, the plan said. The plan calls for an initial $8.5 billion investment from 2026 through 2031, which would be financed with the issue of three bond tranches floated in 2026, 2028 and 2029. The bonds would be backed by future toll revenue.

States that want to install tolls on roads built with federal funds are required to apply to one of six federal programs that allow tolling on federal-aid highways. HNTB recommends that Michigan go through two federal programs, the Section 129 General Tolling Program for bridges and the Value Pricing program.