Michigan needs to fix roads, while state is $10B below Headlee tax limit

Finding the money to fix Michigan roads won’t be easy — there’s no pot of gold — but there are billions of dollars sitting on the sidelines.

As Gov. Gretchen Whitmer gears up on Tuesday to unveil her first budget, which she said will have a comprehensive plan to fix infrastructure, it’s worth looking at the overall state of Michigan’s tax system.

Over the past two decades, as infrastructure was neglected, changes in Michigan tax policy created a substantial decline in state revenues. Robert Kleine, state treasurer under former Gov. Jennifer Granholm, estimates that if Michigan had maintained its tax structure of the mid-1990s, the state now would collect $4 billion to $5 billion more per year.

That far exceeds the more than $2 billion estimated it would take to solve the roads crisis.

The long slide in revenues came from modifications of tax rates, credits and exemptions. In addition, Michigan lawmakers failed to adjust as inflation ate away at the budget’s buying power.

To understand where we are today, it helps to go back to the Headlee Amendment.

It starts with Headlee

In 1978, at the height of an anti-tax revolt, Michigan voters approved a state constitutional amendment placing numerous limits on the government’s taxing powers. That provision, known as the Headlee Amendment, still serves as an annual ceiling on overall tax revenues.

It was named for author Richard Headlee, an anti-tax crusader and insurance executive who was a critical figure in Michigan’s conservative movement. In 1982, Headlee won the Republican gubernatorial primary, but ended up losing to Democrat Jim Blanchard in the November election.

Ten years later, Headlee played a lead role in another successful ballot proposal campaign, this time to impose term limits on state legislators. He died in Utah in 2004.

The Headlee Amendment was aimed at curbing government spending — and it has certainly worked.

Headlee requirements have actually become virtually irrelevant in tax debates now. That’s because the state is now $10.4 billion below the maximum allowed by the amendment. According to the State Budget Office, that gap will reach almost $12 billion by 2021.

Eric Lupher, executive director of the nonpartisan Citizens Research Council (CRC), said that roads are the state’s highest priority and they need to be addressed accordingly.

“We are so below that [Headlee] limit that even a tax increase of the magnitude of what’s being talked about wouldn’t come close to the limit,” Lupher said.

State Senate Majority Leader Mike Shirkey (R-Clarklake) said last month that more revenue is needed for roads, although the GOP leadership has shown no indication that it’s willing to entertain the kind of increase that would get the job done.

A bipartisan group of former lawmakers has calculated that bringing 95 percent of Michigan roads to good condition would require a 47-cent gas tax hike, phased in over several years.

It’s numbers like those that convince state Sen. Curtis Hertel (D-East Lansing) that relying solely on gas taxes is a nonstarter. As the top-ranking Democrat on the Senate Appropriations Committee, Hertel will play a key role in the coming months as a point man for Gov. Gretchen Whitmer in the debate over reviving the road system.

The billions of dollars lost, he said, must be on the table. He also echoed State Budget Director Chris Kolb, who said in January that the General Fund — the state’s discretionary spending account — hasn’t grown since he was in in the state House from 2001 to 2007. 

“I think it’s certainly part of the conversation,” Hertel said. “The Michigan budget has been flat for more than a decade and we … need to get back to a reasonable place.”

Essentially, Hertel favors new taxes that feed the state’s general fund and could create a new source of road revenues. His priority is boosting the corporate income tax.

In 2011, the Legislature approved Gov. Rick Snyder’s overhaul of business taxes, which rewarded them with a roughly $2 billion annual tax cut. That move reduced business taxes by about half. Some corporations also have started cashing in several hundred million dollars’ worth of economic development tax credits earned mostly during the Granholm administration.

As a result, the business community’s contribution to the General Fund stands at 2 to 3 percent in recent years, according to the State Treasurer’s office.

Budget figures show that creating new sources of road revenue would certainly have to extend beyond the corporate income tax into other contentious areas. At the same time, most legislators seem more than a little reluctant to increase the state levy at the pump under the current circumstances.

After two decades of failing to address Michigan’s falling road revenue, the Legislature in 2015 approved hikes to the gas tax and vehicle registration fees.

Michigan fees are among the highest in the nation after the 2015 increase. It is one of the few states with a top-10 ranking in fuel taxes and registration fees.

Raising new money within the General Fund would allow lawmakers to target the state’s worst roads and highways. In contrast, gas taxes are subject to a formula that shares the money among the state, counties, cities and villages. No variations are allowed.

Blood from a turnip

Charles Ballard, a Michigan State University economist, said the Legislature’s willingness to let revenues decline by huge amounts is “as big a story as any” about Michigan’s fiscal health. Almost every state department has been hit with spending cutbacks.

The general fund sits at nearly the same level as it did in 2000, but when adjusted for inflation, it is down 30 percent.

“We’ve squeezed blood out of this turnip to the point where there’s no blood left,” Ballard said.

The economist said the House and Senate could set their sights on a modest goal of making Michigan average. By that, he means raising Michigan’s overall state and local tax level.

Ballard estimates that if Michigan rose to an average state in that category, it would raise an extra $3.5 billion a year. Again, that’s more than enough to provide the more than $2 billion annually needed for roads.

In addition, Ballard suggested that Whitmer start referring to Michigan as a low-tax state at every opportunity. While Michigan once was labeled a high-tax state, those days are long gone, he said.

The Washington, D.C.-based Tax Foundation ranks Michigan 11th lowest for corporate and sales taxes and 12th for income taxes.

Lupher of the CRC is skeptical that using the Headlee Amendment cap as a sales pitch for more revenues will work. The constitutional provision is 40 years old, he said, and few people understand it.

Granholm tried highlighting the Headlee issue during the height of the Great Recession and was brushed aside by Republican lawmakers.

Kleine, Granholm’s treasurer during her second term in office, said a call for more revenue might work if public polls start showing that anger about road conditions substantially exceeds irritation about taxes.

“There’s a chance. Everybody sees how terrible their roads are,” he said. “It’s a tough pill to swallow, but at the rate we’re going, I think our roads may be reduced to gravel.”