Michigan May Drop Fuel Excise Tax for Wholesale Sales Tax

Newly reelected Michigan Governor Rick Snyder may be the first governor to take advantage of the dramatic drop in gas prices by pushing for a gas tax increase in the lame-duck legislative session.

"Snyder said he hoped this fall's lower gas prices of less than $3 a gallon 'could be helpful' in getting reluctant lawmakers to approve an increase in the gas tax by switching from the cents-per-gallon levy to percentage-based tax that is indexed to the price of fuel," writes Gary Heinlein of The Detroit News.

In fact, when similar legislation was proposed last spring when "gasoline cost about $1 more per gallon," it failed to clear the Senate.  

The current 19-cent-a-gallon retail tax at the pump would be replaced by a wholesale [sales] tax starting at 9.5 percent April 15 and increase over four years to 15.5 percent by Jan. 1, 2018. The legislation is expected to generate the $1.2 billion annually sought by Snyder to fix roads and bridges at a faster pace.

"It's a huge breakthrough for Gov. Rick Snyder, who has been pushing for increased road revenues for three years, and for business and labor groups that say Michigan's crumbling infrastructure is holding back the state's economic development," write Paul Egan and Kathleen Gray of the Detroit Free Press.

According to a Senate Fiscal Agency analysis, the bill could raise between $781 million and $1.5 billion extra per year for roads when fully implemented, depending on the wholesale price of gas.

Two significant items to note on the Senate vote to pass the wholesale fuels sales tax legislation:

• The Senate earlier rejected an alternative to leave the excise tax untouched and instead raise the general sales tax (applied to all taxable goods and services as opposed to only gasoline) by one-cent, with most of the increased revenue applied to roads and transportation. However, the option may return if senators can muster the votes.
• The wholesale fuels sales tax conversion of the excise tax was was not passed until "(Senate Majority Leader Randy) Richardville said he persuaded more Detroit lawmakers to back the legislation when he noted that amended legislation approved Thursday would give Detroit more flexibility to use highway money dedicated to the city for mass transit," notes Heinlein.

If the one-cent general sales tax alternative wins passage, Snyder indicated he is open to two competing transportation measures to go before voters next year where "voters would choose whether they want to pay more taxes for gasoline or on their other retail purchases," adds Heinlein.

Two notes on Michigan's gasoline tax:

• The gasoline excise tax was last increased by Republican Gov. John Engler in 1997 by four cents, though he was criticized for not going "far enough."
• At 19-cents, the excise tax matches Arizona, ninth lowest in the nation. However, it is one of only four states, according to ITEP, that applies general sales tax to fuel. As of July 16, when gas averaged $3.76 per gallon in Michigan, it had the fifth highest gas tax in the nation per API [PDF].