Tax Policy and Transportation: A Case Study in Michigan

Tax Policy and Transportation:

A Case Study in Michigan

By John DeLora

Being a peninsular state, Michigan’s transportation policies have always been governed by its geography. Water-borne commerce must move around the peninsula, partially mitigating its cost advantage. Even then, the state’s northern location makes water transportation viable for only nine months of the year.  The state’s shape means that for the most part, everything is at the end of a branch line unless direct routings through the state are created. For these reasons, Michigan has historically been very sensitive to changes in transportation economics and changes in public policy toward transportation.

When Europeans first came to Michigan in the late 1600’s and early 1700’s, the only effective way to travel distances of any length was by canoe or boat. For that reason, the French were able to establish control of the upper Great Lakes by establishing settlements at key chokepoints, notably at St. Ignace (1688), Detroit (1701) and Ft. Michilimackinac (1715). Land communication was limited to a network of Native American trails which allowed for little more than single-file walking[1]. When the United States took control of Detroit in 1796, military units gradually improved the trails and began constructing military roads. Even so, the trail and road system was still so primitive that as late as 1820 there was only one four-wheel wagon in Detroit. In 1821, Gov. Lewis Cass laid out the first plan for roads in Michigan.[2]

During the early years of the 19th century, all forms of transportation were considered to be “highways,” and “highway” simply meant a mode of transportation. For example, the Detroit River was specifically declared to be a “highway” by Congress in 1819[3]. The network of military roads was expanded during the War of 1812. After the war, maintenance of the roads ended for all practical purposes. To maintain some semblance of a road system, the legislature required adjoining property owners to maintain the roads. This system was administered by the townships, with no coordination between townships or the county. It was accepted that the township road supervisor would see that the roads adjoining his property were dealt with first. In lieu of cash taxes, farmers had the option of working on the roads as payment. If he was unable to work off the tax, a rate of 62.5 cents/day was assessed. The practice of working off one’s road taxes, called the Statute Labor System, was the cornerstone of 19th century highway taxation policy in early Michigan. Each able-bodied male living within a local designated road district was directed to work off his road tax at the rate of not more than thirty days per year.[4] In practice, this resulted in little more than the roads being kept clear of trees and brush. Virtually nothing was done to improve roadbeds or drainage. As a result, the state began awarding franchises to private companies to operate and maintain the old military roads. Usually these franchises built what were known as “plank Roads”. In exchange for upkeep, they were allowed to charge tolls for their usage. During the 19th century, the state chartered over 200 private road companies. The plank roads were made of heavy, 3 inch thick planks laid across stringers, and initially were far superior to existing roads. However, the underside of the planks quickly succumbed to moisture and mud, and became a maintenance nightmare. After taking a trip on a plank road between Kalamazoo and Grand Rapids, Mark Twain was quoted as saying, “The trip wouldn’t have been so bad if now and then some unconscionable scoundrel had not dropped a plank across the road.[5]” Most of these companies continued operating late into the 19th century, and several survived until just before World War I.

The tax system was partially reformed in 1881, allowing for direct payment of road taxes instead of relying totally on the statute-labor system. The first road district larger than the township level was created in Bay County in 1883[6]. This road district encompassed eight townships and provided for better coordination and planning of road construction. Other county systems were created in 1893 with passage of legislation which allowed other counties to follow the lead of Bay County.

After the Erie Canal was completed in New York, its success was so great that canals were seen as the future of transportation. Thousands of new settlers poured into Michigan to get cheap land. As the first railroad was completed out of Baltimore, enthusiasm for cheap transportation surged, and the Michigan Constitution of 1837 explicitly encouraged state assistance in internal improvements. However, most of the early railroad and canal corporations were financed by smoke and mirrors, not to mention a healthy dose of snake oil. In 1839 a financial panic ensued, and by 1840 most efforts had collapsed. The only canal which was actually constructed far enough to begin operations was the Clinton and Kalamazoo canal. It was completed from the Clinton River near Mt. Clemens to near Utica, cost $350,000 to build and took in $90.00 during the one summer it operated.[7] It never came close to reaching its terminus on the Kalamazoo River. This ended canal building efforts in Michigan.

In 1833 the first railroad began operating between Monroe and Adrian. This was quickly followed by several others. Arrival of a railroad usually meant up to a 90% drop in freight rates from those charged by wagon-haulers.

The Panic of 1839 caused the nascent railroad construction to come to a halt as virtually every line went into receivership. The legislature recognized the importance of rail to the state’s future, and took over the three most promising lines. The Michigan Southern, which ran west from Monroe, the Michigan Central, which ran west from Detroit, and the Michigan Northern, which ran west from Saginaw. The lines were already in very poor condition, and the state provided only minimal assistance to keep them going. For example, under state ownership, strap rail was still being used, which resulted in “snakeheads.” Snakeheads were caused by the rail car wheels rolling over the strap rail, causing it to curl up, causing derailments, and worse, often coming up through the floor of a car, where passengers risked impalement.

The earliest railroads were seen as little more than a low-cost way to get goods and people from farms towns to the nearest city. Soon, visionary businessmen such as Henry B. Joy saw the potential for the railroad to connect large numbers of cities together in a large network, and understood the enormous profit potential which lay in being able to ship goods not to just the nearest city, but to distant points. He bought out the strongest of the state’s three lines, the Michigan Central, and began its spectacular growth.

As noted above, their efficiency caused freight rates to drop precipitously, allowing farmers to keep more of the money from the sale of their crops. It also greatly reduced shipping and travel times from days to hours, and allowed isolated communities to become part of the larger world.

The Civil War saw an enormous expansion of railroads and the ever-larger systems began using rather brutal tactics to squeeze more money from customers. One favorite early tactic was to sell tickets for travel on a specific train and then have the train leave before its scheduled departure. The railroad would refuse to exchange or refund the ticket, forcing the customer to buy another ticket for the same trip on a make-up train. The plank roads were considered a necessity to preserve some form of competition to the railroads and hold down freight rates[8].

Very large shippers such as Standard Oil not only got rebates for extremely large volumes, but they also got a portion of their competitor’s rates under the table. Monopolistic abuses such as these brought about the creation of the Interstate Commerce Commission in 1887. As time went on, the ICC viewed its role less as a body to prevent abuses, and more as a body to perpetuate the status quo. For example, when a railroad would reach agreement with other carriers for a routing that would allow for freight loads in both directions, competing shippers on other lines would file “unfair competition” charges with the ICC and were often upheld. The ICC’s enforcement of freight rates was heavily biased toward shippers, and allowed railroads to earn only a very modest return on investment from WW II to the passage of the Staggers Act of 1980.[9] The trigger for passage of the Staggers Act was the bankruptcy of the Penn Central, quickly followed by the Rock Island and six other northeastern railroads (Central Railroad of New Jersey, Erie Lackawanna, Lehigh & Hudson River, Lehigh Valley and Reading.

By the 1890’s two new passenger modes came into being: bicycling and interurbans. It seems hard to believe now, but bicycles were the sports cars of their day, and any young man who wanted to be seen as dashing and modern had to have one. In order to enjoy their new sport, bicycle associations affiliated with the League of American Wheelmen to advocate for “good roads”. They worked in cooperation with the Grange movement for government funding for better roads. The Grange generally lobbied Congress, and the Wheelmen worked with state legislatures[10]. Their concern was that other than the plank roads, virtually no roads had any type of subgrade, and were notorious for turning into quagmires after even modest rains. This coalition led to the first direct federal involvement in roads since 1816. In 1897 the first federally financed section of what we would call a modern gravel road was built at the New Jersey Agricultural College for the sum of $321.00. It proved to be a good all-weather road, and its popularity persuaded Congress to begin making annual appropriations out of general funds. With this, the long running campaign for “good roads” was underway.

The second new mode was the interurban- fast (up to 80 mph in open country), frequent, lightly built variations of street cars. Entirely privately built, the interurbans rapidly expanded, carrying mostly very short-haul traffic and some less than carload freight. The first lines in Michigan began operating in 1895. The lines operating out of Detroit were among the earliest interurbans, but because of the rapid rise of highway transport in Michigan, public and private alike, the state’s interurban mileage was among the first to be swept away.[11] One of the biggest problems facing the interurbans was political posturing by the then-Mayor of Detroit, James Couzens who campaigned on a platform that the interurbans were exploiting the citizens by charging rapacious fares. He forced maximum fare rates through the City Council, which barely allowed a small profit. He also tried twice to have the city take over the lines of the Detroit United Railways inside Detroit, but was rebuffed by voters twice. In 1920 a third attempt was approved by voters.[12] Most of Michigan interurbans were built on public land alongside roads. This was a cheap and easy method to get lines in operation, but led to disastrous consequences in later years.

As more public funds began pouring into roads, driving demands grew, and pressure rose to improve roads further. In the mid-1920’s, Wayne, Oakland and Macomb counties agreed on a unified road plan which envisioned divided highways on the major arterials radiating out of Detroit. The interurbans were ordered to relocate their tracks at their own expense.[13] This proved to be a critical blow to the finances of the interurbans, which were already suffering a traffic decline after World War I.

The legislature passed the County Road Act of 1893 which permitted a county, by a vote of the people, to establish a county road commission and levy a road tax. In 1905 the State Highway Department was created. By 1905, only 18 of 83 counties had set up county road commissions; by 1916, 59 counties had followed suit. In 1907 another important objective of road reformers was achieved when the Statute Labor System was abolished and replaced by cash road taxes. This greatly improved the efficiency of road building programs throughout the state and made possible the hiring of full-time trained road personnel and the purchase of road equipment.[14] With the creation of the State Highway Department, the state began awarding subsidies to local governments for improved roads which met department standards.

The State Trunkline Act of 1913 established a much larger road system and doubled the amounts paid to local governments.[15] In 1916 this was followed by the Federal Road Aid Act, which allowed for federal matching funds for road construction.[16] In 1925 the legislature passed a gasoline tax whose revenues were dedicated exclusively to roads. This flood of cash into the highway system made it impossible for interurbans to compete with driving. Within a few years, interurban abandonments multiplied, and by 1928, most of Michigan’s system was gone. A few systems continued once a day service (or less) to keep their franchise rights intact, but it was a losing battle. The last interurban quit operations on May 31, 1934/[17]

In 1954 the National Defense and Interstate Highway Act was passed, pouring billions of dollars into limited access road construction. This act gravely affected the viability of passenger train service. In Michigan, the first links of what is now I-96 were opened in 1957. The final link was completed in 1962. The route ran almost completely parallel to Chesapeake and Ohio’s popular Pere Marquette route from Detroit to Grand Rapids. A C&O executive remarked at the time,”When I-96 was opened between Detroit and Grand Rapids, you could see the bottom fall out”[18] The C&O petitioned the Michigan Public Service Commission to abandon the route, but was denied. Within months, the train was reduced from six coaches and a diner/lounge car to a single locomotive and coach, plus a “Flexi-van” (an early version of the Road Railer).

In 1964 a state Constitutional Convention rewrote Michigan’s Constitution. It provided for transportation revenues (gasoline taxes, vehicle registration fees, etc.) to go into a Comprehensive Transportation Trust Fund (CTF). It also required that a minimum of 90% of expenditures from the CTF be dedicated to highways[19]. Public transportation (city buses, intercity bus, passenger and freight rail) rarely have gotten the full ten percent allowed. Expenditures still require an appropriation from the legislators. The one bit of “wiggle room” in the Constitution allows for spending from highway funds on “appurtenances” to highways. This has never been legally defined by the courts, but has been used occasionally to provide some funding to intermodal stations serving buses.

The final blow for private passenger trains came in March, 1968 when Penn Central petitioned the Interstate Commerce Commission to abandon all passenger service west of Buffalo, NY and Harrisburg, PA. This prompted the ICC to hold off on almost all future abandonments until the Congress found a solution. In 1970, Congress created Railpax to study solutions. The recommendation was to create the National Railroad Passenger Corporation, which adopted the marketing name “Amtrak.” The legislation provided that railroads that “joined” Amtrak would be allowed to discontinue all passenger service in exchange for an amount of cash equal to half of the previous year’s passenger losses, or by donating equipment at fair market value. All but three railroads (Southern, Rock Island and Denver and Rio Grande) joined. The Southern and Denver and Rio Grande eventually joined Amtrak, but the Rock Island held out until it was liquidated in bankruptcy proceedings. Congress granted Amtrak startup money of $40 million plus $100 million in loan guarantees.[20] The creation of Amtrak was viewed at the time by both the railroads and the Nixon administration as an orderly wrap-up of passenger train service in the U.S.[21]

On May 1, 1971, Amtrak began operations. On that day, the state lost 3,440 route-miles of passenger service, including the following routes:

  • Detroit-Chicago (Grand Trunk)
  • Detroit-Cincinnati (Chesapeake & Ohio)
  • Detroit-Grand Rapids (Chesapeake & Ohio)
  • Detroit-Buffalo-New York City via Southern Ontario (Penn Central)
  • Detroit-St. Louis (Norfolk & Western)
  • Detroit-Washington, DC (Chesapeake and Ohio)
  • Muskegon/Grand Rapids-Chicago
  • Toronto-Port Huron-Lansing-Chicago[22]

These drastic cuts aroused a backlash of public opinion, leading the Michigan Association of Railroad Passengers (MARP) to complain to then-Governor Milliken and the legislature to restore some service. In 1974, the Blue Water Ltd restored service between Port Huron, Lansing and Chicago[23]. Ridership responded, and MARP members gathered 12,000 signatures in two weeks in the Grand Rapids area and presented petitions to Milliken, who ordered the Michigan Department Transportation to run a Chicago-Grand Rapids train. Agreement with the railroads proved difficult, but the Pere Marquette began operations in August, 1984, connecting Grand Rapids, Holland and Chicago[24].These trains were funded by a state match to Amtrak under section 403(b) of the Amtrak legislation.

One unforeseen problem with both Amtrak in general and the state supported trains was that they were funded by annual appropriations with no dedicated operating or capital funding. This meant an annual fight for survival against “free-market” advocates who forgot about the massive subsidies to highways which caused the decline in passenger trains in the first place. In 1979, this was brought to a head when President Carter eliminated 29% of Amtrak route miles to cut Amtrak costs. His timing could not have been worse, coming just as Middle Eastern governments had imposed an oil embargo, causing long lines at gas stations as gasoline supplies were allocated around the country. The remaining trains were packed, and demand for more service grew. Operating on starvation budgets for years, Amtrak managed to survive, just barely. However, ridership has continued to expand, and in recent years Congress has begun to realize that passenger trains have a place in the nation’s transportation system. Even so, passenger train funding still lags far behind the amounts of money appropriated to aviation and highways.

End Notes



[1] History of Roads in Michigan, Dorothy G. Pohl, and Norman E. Brown, p.1

[2] City of Detroit, Michigan, Clarence Burton, p. 671

[3] History of Detroit and Michigan, Silas Farmer, p. 925

[4] History of Roads in Michigan, Dorothy G. Pohl, and Norman E. Brown, p.3

[5] The Plank Road Craze, Dr. Philip Mason, Wayne State University. URL: www.michigan.gov/dnr/0,1607,7-153-54463_18670_18793-52863--,00.html

[6] Michigan Public Act 278

[7] An Economic Lesson from Michigan’s Early History,  Dr. Burton Folsom URL: www.mackinac.org/5

[8] The Plank Road Craze, Dr. Philip Mason, Wayne State University, ibid.

[9] Public Law 96-448

[10] Getting There, Goddard, p. 42

[11] The Electric Interurban Railways in America, George Hilton, p. 287

[12] When Eastern Michigan Rode the Rails, Schramm, Henning and Andrews , p. 13

[13] When Eastern Michigan Rode the Rails, ibid.

[14] History of Roads in Michigan, Pohl and Brown p. 3

[15] History of Roads in Michigan, Pohl and Brown p. 4

[16] History of Roads in Michigan, Pohl and Brown p. 4

[17] When Eastern Michigan Rode the Rails, ibid., p. 8

[18] All Aboard! A History of Railroads in Michigan, Willis Dunbar, p.291

[19] Michigan Constitution, Art. IX, Sec. 9

[20] Phillips, Don. Railpax Rescue. in Journey to Amtrak; The year history rode the passenger train. Ed.   Harold A. Edmonson. Milwaukee, WI: Kalmbach Pub. Co., pp. 8–11 (1972)

[21] Luberoff, David. Amtrak and the States. Governing Magazine. p.85, November, 1996

[22] Official Guide of the Railways, April, 1971 and May, 1971

[23] Official Guide of the Railways, September, 1974

[24] Official Guide of the Railways, September, 1984

Bibliography

  1. History of Roads in Michigan, Dorothy G. Pohl, and Norman E. Brown, URL: www.michiganhighways.org/history.html. A five page internet article
  2. City of Detroit, Michigan, Clarence Burton; a four volume, comprehensive history of the Detroit region
  3. History of Detroit and Michigan, James Farmer; A two volume history of Detroit and Michigan
  1. 4. The Plank Road Craze, Dr. Philip Mason, Wayne State University. URL: www.michigan.gov/dnr/0,1607,7-153-54463_18670_18793-52863--,00.html
  1. An Economic Lesson from Michigan’s Early History,  Dr. Burton Folsom URL: www.mackinac.org/5
  2. Getting There ,Steven Goddard; an excellent history of the development of the highway lobby

7. The Electric Interurban Railways in America, George Hilton, p. 287

8. The Electric Interurban Railways in America, George Hilton, p. 287

9. All Aboard! A History of Railroads in Michigan, Willis Dunbar, p.291

10. When Eastern Michigan Rode the Rails, Jack Schramm, William Henning and Richard Andrews. One of a series of books, it is the best researched and authoritative works on transit ever written. First printed in 1984, it remains the standard reference on transit in Southeastern Michigan. Highly recommended

11. The Official Guide of the Railways; Published monthly, a complete guide to passenger train schedules and equipment for North America since 1868. It even shows trains the railroads refused to acknowledge the existence of in their final years