Michigan Voters to Consider Complex Tax Package
January 16, 2015
On May 5, Michigan voters will go to the polls to consider a constitutional amendment raising the state sales tax from 6 to 7 percent and trigger the enactment of a broader tax 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 tax. 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 base. 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 Credit (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 tax 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 depreciation. Registration fees would also be increased on heavy trucks. Revenue Impact: +$95 million.
Two others bills on internet sales tax 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 inflation 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 tax 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.