Michigan Tax Proposal on Ballot Next Week

April 28, 2015

A week from today, voters in Michigan will go to the polls to vote on Proposal 1, a constitutional amendment and “tie-barred” legislative tax 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 tax, 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 base (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 tax. 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 inflation 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 Credit (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 tax 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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