Wednesday, October 21, 2009

Gas Tax Increase Acceptable Only if Coupled With Change in Allocation Formula

State’s deteriorating roads could lose almost half of their funding if state can’t find the money to match federal dollars earmarked for Michigan Tom Gantert,, October 18, 2009 reports the following:

According to the Michigan Department of Transportation, the state could lose a combined $1.9 billion in federal dollars in 2011, 2012 and 2013 because the state may not be able to afford the 20-percent matching funds necessary to receive federal support.

“In 2010, the state has $1.2 billion set aside for highway and maintenance programs. Without the federal aid, that annual figure would drop to $477 million in 2011, $524 million in 2012 and $418 million in 2013.

State and federal gas taxes and vehicle registration fees are the primary sources of revenues for the Michigan Transportation Fund. Every consumer pays 19 cents in state taxes and 18.4 cents in federal taxes for every gallon of gas. That 18.4 cents is given back to the states by the federal government with some conditions. The state must provide matching funds to the returned-federal tax. The federal government returns to Michigan all but about eight cents on every dollar.”

Here’s the rub:

“According to the Michigan’s Roads and Bridges 2008 annual report put out by the state’s Michigan Transportation Asset Management Council, more of Michigan’s roads are falling into disrepair every year.

The council says about 17,378 lane miles of federal-aid-eligible roads were classified as in poor condition. Almost 1/3 of the state’s federal-eligible-roads are now in poor condition. That number has jumped from 13.6 percent in 2004 to 31.6 percent in 2008. The council stated that in 2008, only 19.4 percent of the state’s federal-eligible roads were in “good” condition.

Even worse, it’s believed that 43 percent of the state’s non-federal-aid roads (9,223 lane miles) are in “poor” condition.

It would cost $7.2 billion to bring all of the state’s roads up to “good” condition, the council estimated.”

"Doing nothing on this key issue would mean lost jobs, bad roads, sending federal money for Michigan to other states, and a failure to improve public transit — which does not sound like a winning political strategy to me," Michigan Chamber of Commerce CEO Rich Studley has said. The SPECIAL REPORT: Michigan's tax reform playbook, by The Center for Michigan - August 6, 2009.

So how is Michigan to come up with the matching funds?

“Michigan’s flat 19-cents-a-gallon gas tax was last raised in 1997. . . . In a rare show of consensus, Granholm, MDOT officials and the Michigan Chamber all back changing the tax to a percentage of the wholesale price, which means the state would take in more when gas rises and less when it falls. Although the Chamber generally opposes tax increases, Studley said more money for roads is critical for businesses.” The SPECIAL REPORT: Michigan's tax reform playbook, by The Center for Michigan - August 6, 2009.

While I am also not generally in favor of tax increases, a state gas tax increase would be consistent with the basic principle of public finance is that, to the extent possible, users of government services that directly benefit from the provision of such services should pay for the privilege of doing so. That is, user fees are the most defensible form of taxation. And, while gas mileage varies from vehicle to vehicle, the amount of gas consumed is a close approximation of the usage of the roads and highways. Further, if we are not willing to pay for essential government services that we demand and use, what are we willing to pay for?

I would not favor a gas tax increase, however, without a change in the allocation formula for distributing about $2 billion of funds per year from the Michigan Transportation Fund under Public Act 51 of 1951. The current distribution formula is primarily based on the number of miles of roads and highways in the various jurisdictions. The formula does not distinguish between 2-lane and 4-lane roads, nor consider highway utilization factors such as vehicle miles driven or even the physical condition of the roads. Inefficient allocation of scarce resources results, with rural areas with relatively lightly traveled roads getting a disproportionate amount compared with more urban areas. See the Citizens Research Council’s February, 2008 report Improving the Efficiency of Michigan’s Highway Revenue Sharing Formula

To make matters worse from the perspective of the voters of the 55th Legislative District which I expect to represent, Monroe and Washtenaw Counties fare very poorly in the current system. On a per capita basis, Washtenaw County is second to last among the counties, while Monroe County is 4th from last. On a vehicle miles traveled basis, Monroe County is dead last, and Washtenaw County second to last. CRC, pages 8 and 9.

One proposal to raise the gas tax 9 cents per gallon over 3 years and the diesel tax 13 cents over three years would generate an additional $500 million each year for Michigan’s highway system after being fully phased in. If the allocation formula is not changed, some of the additional money would go to counties where the roads are in much better shape than in other counties. The formula must be changed to put more emphasis on highway condition, capacity and utilization, before any increase in the gas tax would be acceptable.


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