LANSING – Gov. Gretchen Whitmer sought to fulfill her campaign promises in her first budget Tuesday, calling for a massive hike in fuel taxes to "fix the damn roads," major new spending on education, and repeal of the unpopular pension tax introduced by her predecessor.

Whitmer's budget would replace revenues lost from the repeal of the pension tax by taxing businesses exempted from the corporate income tax.

The $60.2-billion budget for the 2020 fiscal year that begins Oct. 1 represents a 3.6 percent increase, or an increase of 2.5 percent if the extra road spending is not included, Budget Director Chris Kolb said.

“I’ve heard from people all across Michigan and this budget reflects the priorities they have shared,” said Whitmer, a Democrat who took office Jan. 1.

“People are tired of driving on crumbling and unsafe roads and bridges, they want to turn on their tap and know that the water is clean and safe, and they want a strong educational system that leads to opportunity and a good job.”

Many aspects of Whitmer's budget are expected to face opposition in the Republican-controlled Legislature. Much of the reaction from GOP lawmakers was measured and somewhat muted on Tuesday, though reaction from the House, which tends to be more conservative, was more hostile than that from the Senate. The governor struck a conciliatory tone.

"This is Day One of the budget process," said Whitmer, who is embarking Wednesday on a statewide tour to try to sell the plan. She said she is "open to other ideas," but "it has to be a real solution to Michigan's problems."

More would pay corporate income tax to replace elimination of pension tax

By eliminating the tax on certain pension income, which took in about $300 million annually, more than 400,000 Michigan families will save an average of $800, officials said.

The corporate income tax, approved under former Republican Gov. Rick Snyder when the Michigan Business Tax was eliminated, is a 6 percent tax that applies only to "C" corporations — ones with shareholders whose names usually end with "Inc." Thousands of other Michigan businesses, known as "S" corporations or "pass-through corporations," including partnerships and LLCs, were exempted from the tax.

Under Whitmer's proposal, owners of those types of businesses would be taxed only once on the income, but the income would generally be taxed at the 6 percent corporate income tax rate, rather than at the personal income tax rate of 4.25 percent, as it is now, officials said.

For the newly taxed businesses, the first $50,000 would be exempt, Kolb said. Also, the state taxes paid would be deductible on federal income tax returns. The expanded business taxation is expected to net the state an extra $280 million a year — close to what would be lost from repeal of the pension tax — but after federal tax offsets would cost Michigan business owners only about $105 million in additional net taxation, said Michigan Treasurer Rachael Eubanks.

“Gov. Whitmer’s proposal would be a major step backward and a job-killer for small businesses, who make up most of the employment and employment growth in our state," said Rob Fowler, CEO of the Small Business Association of Michigan.

Whitmer said her budget involves tough but necessary choices.

"No one likes to raise taxes, but the hard truth is we've got to get to work," Whitmer told lawmakers during a joint session of the House and Senate appropriations committees.

"Every time we don't, we are jeopardizing our economic future."

Fuel tax would target critical roads first

Whitmer's budget calls for a 45-cent-per-gallon increase in the fuel tax, to be introduced in three steps between Oct. 1 of this year and Oct. 1, 2020.

Whitmer estimates the added fuel tax would raise an extra $2.5 billion. Instead of putting that money through the regular formula under Public Act 51 of 1951, under which most of the road money goes to local road agencies, a greater proportion would be spent on the most heavily traveled roads, according to budget documents.

By using the new revenue to fund roads, the state would reclaim up to $600 million in general fund spending that had been targeted for roads under the 2015 funding plan, allowing that money to be spent on needs such as universities that are more typically paid for with general fund dollars, Kolb said. After allowing for the shift in those general fund dollars, the net amount of new money available for spending on roads would be $2.1 billion, according to budget documents.

Kolb said the new road revenue would be targeted at "the most heavily traveled roads and the most economically important roads in our state, regardless of whether they are state roads or local roads."

Putting 45 cents on top of Michigan's current 26.3-cent-per-gallon fuel tax, when Michigan's fuel sales are also subject to the state's 6 percent sales tax, would give Michigan the highest fuel taxes in the nation.

Whitmer said the impact on the typical motorist would be about $276 a year — considerably less than the cost of road-related repairs, which one recent study pegged at $562 per motorist per year.

Sen. Wayne Schmidt, R-Traverse City, wasn’t ready to immediately shoot down the governor’s gas tax increase proposal.

“I don’t want to say anything is dead on arrival,” he said. “It’s the governor’s first budget, and I guess it’s ‘go big or go home.’ It’s certainly a lot bigger than I originally anticipated, but it’s a starting point.”

But Rep. Shane Hernandez, R-Port Huron, was much more critical of the proposal, including the idea of moving away from the Act 51 road funding formula that benefits many smaller communities.

“Tax increases aren’t solutions," Hernandez said. "Unfortunately, what we heard from the governor are plans to tax and spend — not real solutions for fixing our roads, improving our schools or continuing Michigan’s economic comeback.”

Sen. Curtis Hertel, D-East Lansing, applauded Whitmer for “being bold and talking about a solution that actually solves the problem." He said he hopes "my colleagues on the other side of the aisle will either support that plan or come up with a different one.”

Sen. Jim Stamas, R-Midland, said the Legislature has to look within the existing budget first to find resources to fix the roads.

Only after that “can we talk about where we go for additional revenue," Stamas said.

Whitmer said the plan would bring 90 percent of Michigan's roads into good or fair condition by 2030.

Kolb told lawmakers, "If we don't, the road conditions will continue to deteriorate."

Currently, 78 percent of state trunk lines are in good or fair condition, but without further funding increases, that percentage is forecast to drop to 54 percent by 2024, according to the Michigan Department of Transportation.

Laura Cox, chairwoman of the Michigan Republican Party, said that under the gas tax proposal, "while our roads may improve, they would simply end up as well-paved pathways for jobs and people to leave Michigan."

Earned Income Tax Credit would be doubled

The governor proposed doubling the state Earned Income Tax Credit (EITC) for lower-income working families in two steps, from 6 percent to 12 percent — a move she said would save eligible families $30 a month to offset extra fuel costs.

For 2019, the maximum EITC would increase to $583 for families with two children, up from $343 in 2018. The change is expected to cost the state $76 million in 2020, rising to $114 million in 2021.

More money for education

The budget also calls for a $507-million boost for K-12 schools, one of the largest proposed increases in many years.

And it calls for hikes of 3 percent each for both universities and community colleges, with a tuition restraint for each of 3.2 percent.

The budget would reduce the foundation allowance for cyber schools by 20 percent. Whitmer said they don't have the same level of expenses as brick and mortar schools.

It also calls for restoration to the School Aid Fund of about $500 million now being spent on higher education, or diverted to road funding through a 2018 plan to appropriate new sales tax revenue from Internet sales, so that School Aid Fund spending is focused on K-12 schools.

Clean water, revenue sharing, foster care, police

Whitmer's budget also calls for $120 million to improve drinking water infrastructure and address contaminants.

And it calls for $13.9 million in the Health and Human Services budget to enhance monitoring of and responsiveness to the human impact of emerging public health threats, including contaminated drinking water.

Other budget proposals include:

Revenue sharing increases of 3 percent for counties and for cities, villages and townships, with total revenue-sharing payments projected to increase by over $40 million.

$8.6 million for multiple investments in the foster care and child welfare system "to protect Michigan’s most vulnerable children and keep them together with their parents when possible."

$10.5 million to support a corrections officer academy with an expected graduating class of 408 to address higher-than-anticipated attrition.

$8.6 million to support a new trooper recruit school with the expectation of graduating 50 new troopers, maintaining Michigan State Police enlisted strength at approximately 2,100.

$9.6 million to carry out functions related to the passage of Proposal 2, which creates an independent citizen redistricting commission for state legislative and congressional districts, and Proposal 3, which establishes new voting rights.

$100 million in spending cuts to various departments.

A $150 million deposit to the state Rainy Day Fund, which now has a balance of more than $1 billion.



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Education budget targets wide range of needs

Whitmer's call for a $507-million increase in operational funding for K-12 schools is up from what officials said was a $312-million hike in former Republican Gov. Rick Snyder's final budget, presented last year.

Though Whitmer's hike in the per-pupil grant for 2020 is more modest than Snyder's recommendation for 2019, Whitmer's budget calls for much larger boosts in spending on students with special needs.

For 2020, Whitmer is proposing a $180 per-pupil hike for schools at the bottom of the funding scale — a 2.3-percent increase — and a $120 hike in the per-pupil grant for schools receiving the highest grants, which is a 1.4-percent hike, budget documents show.

For 2019, Snyder proposed a $240 per-pupil increase for schools receiving the lowest per-pupil grants, and a $120 per-pupil increase for schools receiving the highest grants, bringing the minimum to $7,871 and the maximum to $8,409, budget office spokesman Kurt Weiss said.

But Whitmer also proposes: $120 million to increase state reimbursement for special education services by 4 percentage points, up from 28 percent currently; $102 million to increase state support for economically disadvantaged, bringing state funding to $894 per eligible pupil, and $50 million to more than double Career and Technical Education funding, to $109 million, or $487 per eligible pupil.

Whitmer's budget also calls for tripling the number of literacy coaches statewide from 93 to 279, with the state paying the entire cost, instead of requiring county-level districts to pay half.

Contact Paul Egan: at 517-372-8660 or pegan@freepress.com. Follow him on Twitter @paulegan4.