Road funding 101: What to know about Michigan’s $2B deal

Michigan will see its largest-ever road funding increase after Gov. Gretchen Whitmer signed a new plan into law
Pot taxes will go up, business tax breaks will be delayed and the state will swap sales tax for a gas tax hike to increase road funding
Local road agencies, who were largely left behind in Whitmer’s prior bonding initiative, will see large funding increases as a result

Gov. Gretchen Whitmer and policymakers took a victory lap Monday as they celebrated the passage of a roughly $2 billion funding increase for state and local road repairs in Michigan.

At a ceremonial bill signing in Clinton Township, Whitmer said the future road repairs will mean “more time being where you want to be, instead of being stuck on the side of the road waiting for a tow.”

Whitmer called the deal “something to be proud of” and said it will lead to “a safer, smoother drive to work or school or the store — fewer popped tires, cracked rims or broken axles.”

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The bipartisan roads plan was also a central pillar of the recently passed state budget, and one that’s already sparked litigation from the marijuana industry, which is fighting a tax hike included in the deal.

Here’s some insight on where the money is coming from, where it’ll be going and whether the “damn roads” will be finally, completely fixed.

New tax, money shuffle

There’s a relatively complex money shuffle behind the scenes making the road funding increase possible. Here are the changes:

The sales tax on gasoline has been eliminated but will be replaced with a 20 cent per gallon increase in the gas tax, which will keep prices roughly the same. The change will mean that all taxes paid at the pump will go to roads, which isn’t the case with sales tax revenue — a longtime goal for some policymakers. At 51 cents per gallon next year, Michigan’s total at-pump state taxes will remain sixth highest nationally and third highest in the Midwest, trailing Illinois at 66.4 cents and Indiana at 54.5 cents, according to the Tax Foundation.
A chunk of corporate income tax revenue — up to $1 billion a year by 2030 — will be dedicated to roads. Some of that is through delayed business tax breaks, and $500 million a year will be redirected from Whitmer’s signature economic development program, the SOAR fund, into a new “Neighborhood Roads Fund.”
A new 24% wholesale tax on marijuana is expected to generate roughly $420 million a year, even as the industry association representing businesses is suing to have it blocked.

A big winner: local roads

When Whitmer took out $3.5 billion in state bonds after lawmakers rejected her first roads proposal in 2019, local roads largely got short shrift as the funding was limited to state-owned trunklines.

The new “Neighborhood Roads Fund” will be funded largely through corporate income tax revenue. It’ll receive up to $1.1 billion this fiscal year, an amount that’ll steadily increase until it reaches slightly more than $2 billion in 2030.

Not all the money will go to “neighborhood roads,” however. While the funding will be split between local bridges, grade separation projects, county road commissions, and city and village road agencies, 20% of leftover funding will go back to the state trunkline fund.

By 2030, nearly 30% of the funding will be set aside for major state thoroughfares — more than city and village road agencies will receive directly.

A new Infrastructure Projects Authority Fund will also get some $65 million a year until 2030, which could be used on projects like inter-city transit.

The funding will be phased in. Here’s how it will be divvied up in the current fiscal year, according to the nonpartisan House Fiscal Agency:

Counties: $457 million
Cities and villages: $246 million
State trunkline roads: $180 million
Infrastructure Projects Authority Fund: $65 million
Local bus operations: $42 million
Rail grade separation fund: $40 million
Airport improvements: $6.8 million
Detroit airport: $6 million

Who’s left out

Removing the sales tax on gas doesn’t come without consequences. Ten percent of that revenue is earmarked for local governments under the state’s constitution, and a whopping 73% goes to fund Michigan’s public schools via the school aid fund.

For schools, the law mandates the state use $677 million a year in general fund revenue to offset sales tax losses, but the state’s largest teachers union remains “concerned about the long-term implications” of the funding shift, according to a statement from Chandra Madaffer, the union’s leader.

Local governments on the other hand, are a bit worse off, estimated to lose about $70 million in this fiscal year. But an influx of local road funding could serve to balance out the funding decline.

Is it enough?

With estimates ranging from a little under and a slightly over $2 billion per year, this deal is of apparently historic proportions. Whitmer recently touted it as the largest road funding increase in Michigan history.

Still, the final deal is significantly smaller than the House’s $3.1 billion plan or the $3 billion that Whitmer called for in her own budget proposal.

The Michigan Infrastructure and Transportation Association — which represents the private road builders that will benefit from new funding — says the state needs $3.9 billion more a year to cover the maintenance shortfall.

Part of the difficulty is inflationary: since Whitmer first proposed a 45-cent gas tax increase to “fix the damn roads” in 2019, the cost to repair a mile of Michigan pavement has grown twice as fast as funding.

Rob Coppersmith, the association’s vice president, still called the passage of the deal a “historic step in the right direction.”

A nod to the future

The new road funding deal is a big deal, but it largely relies on traditional funding methods. The larger state budget, however, includes a separate provision that looks to the future: It directs the Michigan Department of Transportation to launch a road usage charge study and pilot program, at a cost of up to $7.65 million. Some states have been experimenting with mileage taxes for years, but the programs have sparked some privacy concerns.

A cash-for-jobs death knell?

The fate of Michigan’s Strategic Outreach and Attraction Reserve fund, or SOAR, is dim. Don’t consider it totally mothballed, yet, though — there’s a possibility it may metamorphosize into something new.

The $500 million redirected from corporate income taxes to roads mean there will be no more money flowing into Whitmer’s signature cash-for-jobs plan.

But as part of the bipartisan budget compromise, legislative leaders agreed to pass a new law by the end of this year “that will make it easier to create and retain good-paying, high-skill jobs in Michigan,” according to the governor’s office.

What exactly that’ll look like is far from set in stone, but House Speaker Matt Hall, a Republican from Richland Township, said he’d like to see some more accountability measures baked into a new iteration of SOAR. Reporting by Bridge Michigan has uncovered that projects funded by SOAR often failed to deliver the jobs promised at their outset.

“We’re not going to be paying cash up front” or allowing the terms of an incentive deal to change, Hall told reporters last week. “If (the state is) going to pay (incentives), you should only be paying for the high-paying jobs, and it should only be after performance.”

The account itself still has about $600 million left, and Hall suggested he’d like lawmakers to claw the money back.