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Michigan Voters to Consider Complex Tax Package

4 min readBy: Jared Walczak

On May 5, Michigan voters will go to the polls to consider a constitutional amendment raising the state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. from 6 to 7 percent and trigger the enactment of a broader taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and spending modification package designed to raise an additional $1.7 billion a year for transportation, education, and low-income supports.

While most Michiganders are aware of the proposed sales tax increase, the rest of the complex package has gotten less attention. Here, then, are the key components of the tax package, with revenue impacts given based on full phase-in:

  • Sales Tax Rate Increase: The current rate of 6 percent, in place since 1994 (when it was increased from 4 percent) is embedded in the state constitution. In May, voters will decide whether to ratify a constitutional amendment increasing the rate to 7 percent. Revenue Impact: +$1.34 billion.
  • Removing Fuel from Sales Tax: Currently, gasoline is subject to both the sales tax and a motor fuel excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. . The tax package, pending voter approval, would convert all gas taxes into a separate wholesale tax, and thus involves the exclusion of motor fuel from the general sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Revenue Impact: -$752 million.
  • Increasing Motor Fuels Taxes: In addition to removing fuel from the sales tax base (see above), the tax package would also scrap the existing 19 cent / gallon excise (15 cents for diesel) and replace it with a 14.9 percent wholesale tax. Revenue Impact: +$1.2 billion.
  • Low Income Supports: Right now, Michigan low-income taxpayers can claim a state Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC) of 6 percent of the allowable federal credit. The tax package would expand that credit to 20 percent of the federal amount, and also roll back household income qualifiers for the homestead property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. credit for seniors and disabled filers. Revenue Impact: -$260 million.
  • Vehicle Registration Fees: Michigan’s vehicle registration fees vary based on the manufacturer’s price of the vehicle, ranging from $33 to 148. Currently, the registration fees “depreciate” by 10 percent per year for the first five years in a partial reflection of a vehicle’s declining value; the tax package under consideration would phase out that depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. . Registration fees would also be increased on heavy trucks. Revenue Impact: +$95 million.

Two others bills on internet sales taxAn internet sales tax is a sales and use tax collected and remitted on remote sales, many done online. In 2018, the U.S. Supreme Court ruled that states could impose such obligations on sellers lacking physical presence in the state, vastly expanding the reach of these collection and remittance requirements. collections, with an estimated revenue increase of $60 million, are not contingent on voter approval of the constitutional amendment.

When fully implemented, the package’s additional $1.69 billion in revenues will be divided up, with $1.17 billion dedicated to roads, $130 million earmarked for the Comprehensive Transportation Fund (transit), $300 million designated for the School Aid Fund, and $95 million set aside for revenue sharing payments to municipalities.

The transportation components are bit complicated. Should the transportation package be approved by the voters, the current general sales and excise taxes on gasoline would be eliminated as of October 2015 in favor of a 14.9 percent tax on a 12-month rolling average of wholesale gasoline prices, with a three month lag. So, for instance, the June 2016 rate would be on the average wholesale price from April 1, 2015 through March 31, 2015. The initial rate is statutorily linked to the July 2013 – June 2014 period, creating a baseline tax rate of 41.7 cents per gallon for gasoline and 46.4 cents per gallon for diesel. The legislation also includes an inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. adjustment mechanism which provides that the levy cannot increase by more than 5 cents per gallon above the rate of inflation or fall below the initial rate, adjusted for inflation or 5 percent per year, whichever is less. The initial rates are based on an average price per gallon a fraction of a cent under $2.80, which is, of course, significantly higher than gas is selling for in Michigan right now. At $2.80, the current tax system would generate 35.8 cents per gallon, compared to 41.7 cents under the proposed replacement. And at $2.05 per gallon—about what gas is selling for in Detroit right now—the current tax system would only bring in 31.3 cents per gallon, more than ten cents less than the minimum collection under the proposed system.

Originally, Governor Snyder had sought a gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase, supporting a Senate bill which would have replaced the current motor fuel excise taxes with a new wholesale tax that would gradually rise to 15.5 percent by 2018. Only when this proposal stalled in the House did the Governor and legislators strike a last-minute deal involving thirteen different bills and resolutions—the constitutional amendment, the legislation placing it on the ballot, nine “tie-barred” bills that only go into effect if the constitutional amendment is ratified by the voters, and two separate bills on internet sales tax collections.

Snyder’s original proposal had maintaining and expanding transportation infrastructure mostly paid for by the users of that infrastructure. Now, in the plan before voters, only $543 million of the $1.69 billion in new revenue comes from motorists, even though $1.17 billion of the revenue is to be allocated to roads—certainly not the “user-pays” model originally envisioned.

This much is certain: when Michigan voters go to the polls in May, a lot more than just the sales tax rate will be riding on their decision.