A week from today, voters in Michigan will go to the polls to vote on Proposal 1, a constitutional amendment and “tie-barred” legislative 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. package that would raise an additional $2 billion a year for transportation, education, and income supports. I wrote about the ballot initiative a few months ago, but with the vote just around the corner, and with updated revenue projections available, it’s worth taking one more look at what voters are being asked to ratify.
In addition to amending the state constitution to raise the state sales tax, Proposal 1 also triggers the enactment of a package of revenue and spending bills. Here are the key components in summary form, after which I’ll go into slightly further detail on each component:
| TAX COMPONENT | FY 2016 | FY 2017 | FY 2018 |
|---|---|---|---|
| Sales Tax Increase | $1.43 billion | $1.47 billion | $1.52 billion |
| Gas Tax Increase | $463.3 million | $418.6 million | $602.2 million |
| Affiliate Nexus | $60.0 million | $62.0 million | $63.9 million |
| Vehicle Registration | $60.9 million | $91.0 million | $112.0 million |
| Low-Income Supports | $0.0 million | ($261.1 million) | ($267.7 million) |
| Total | $2.03 billion | $1.90 billion | $2.05 billion |
Raising the Sales Tax
Michigan’s 6 percent 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. , which dates back to 1994, is embedded in the state constitution. Technically it’s two levies: a 2 percent tax earmarked for the School Aid Fund and a 4 percent tax split by formula among local governments, the School Aid Fund (again), and the General Fund. All told, the 6 percent levy is divided as follows: the School Aid Fund receives 4.4 percent, 1 percent goes to the General Fund, and the remaining 0.6 percent goes to cities, villages, and townships under the Revenue Sharing Act.
Should Proposal 1 pass, the second of these taxes would be increased from 4 to 5 percent, yielding a total sales tax rate total sales tax rate of 7 percent and changing the distribution to 5 percent for the School Aid Fund, 1.25 percent for the General Fund, and 0.75 percent to local revenue sharing. Motor fuels would come out of the 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. (more on this later). Sales tax collections would increase by an estimated $1.43 billion in Fiscal Year 2016.
Increasing Motor Fuel Taxes
At present, motor fuel is subject to both the sales tax and a 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. . Under Proposal 1, motor fuel would be removed from the general sales tax base and the existing 19 cent per gallon excise would be scrapped, replaced with a 14.9 percent tax on the 12-month rolling average of wholesale gasoline prices (with a three-month lag). An inflation adjustment mechanism provides that the levy cannot increase by more than 5 cents per gallon above the rate of 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. or fall below the initial rate, adjusted for inflation or 5 percent per year, whichever is less.
The average wholesale price will have a floor of $2.80 / gallon, which is of course higher than fuel prices at present, and would yield a 41.7 cpg excise. Combined, the fuel tax proposals are expected to net $463.3 million in Fiscal Year 2016.
Establishing Affiliate Nexus
Legislation tie-barred to Proposal 1 adopts a broad definition of “nexus” to impose sales tax on many online and mail order retailers operating outside the state. Such laws are often called “Amazon taxes,” and this one is projected to bring in about $60 million a year if adopted.
Raising 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 depreciation. Registration fees would also be increased on heavy trucks. The state anticipates $60.9 million a year in additional revenue from these fees.
Enhancing Low-Income Supports
Proposal 1 would more than triple the size of Michigan’s 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). Currently, low-income taxpayers are permitted to take 6 percent of their allowable federal credit; legislation triggered by Proposal 1 would raise it to 20 percent as of tax year 2016. The Proposal also includes rolling 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. Low-income support provided through the tax code will reduce collections by an estimated $261.1 million in Fiscal Year 2017, since tax returns take place after the completion of the year.
Summary
All told, Proposal 1 will increase state revenue by an estimated $2 billion. About two-thirds of new revenue would go to transportation over the next three years. The table below shows the anticipated additional collections and distributions.
| NET IMPACT | FY 2016 | FY 2017 | FY 2018 |
|---|---|---|---|
| Michigan Transportation Fund | $460.9 million | $891.0 million | $1.464 billion |
| MDOT Debt Service | $814.7 million | $456.2 million | $0 |
| Recreation Account | $24.8 million | $25.6 million | $27.6 million |
| School Aid Fund | $336.5 million | $376.2 million | $393.8 million |
| Revenue Sharing | $106.4 million | $114.0 million | $118.3 million |
| General Fund | $286.6 million | $39.6 million | $43.1 million |
| Total | $2.030 billion | $1.903 billion | $2.047 billion |
The vote will be held on May 5th.
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