On May 5, 2015, Michigan voters will be asked to approve Proposal 1, an amendment to the Michigan Constitution that would (1) eliminate the sales tax on retail sales of gasoline and diesel fuel, (2) increase the sales tax on everything else from 6 to 7 percent, (3) dedicate a portion of Michigan’s use-tax revenue to the School Aid Fund, (4) remove four-year universities from the list of School Aid Fund beneficiaries, and (5) add community colleges, career and technical education programs, and scholarships for certain students to the list of permissible School Aid Fund uses. The additional revenue raised from the sales-tax increase would be constitutionally earmarked for a number of programs, including public schools, community colleges, career and technical education, scholarships, the public school employees’ retirement system, and revenue sharing for local governments. Do you notice anything missing from this list? What about roads? That’s right, contrary to what you might have read, the revenue generated from the proposed sales-tax hike would have nothing to do with funding Michigan’s roads. As it turns out, fixing our roads would be funded with an entirely different tax that is not part of Proposal 1 at all. Are you confused yet? You’re not the only one.
Here’s a little background. In Michigan, we currently pay 6 percent sales tax on the retail sale of gasoline and diesel fuel. Of this, 10 cents of every dollar is constitutionally dedicated to revenue sharing for local governments and approximately 73 cents of every dollar is constitutionally dedicated to the School Aid Fund. We also pay a separate fuel tax of 19 cents per gallon on gasoline and 15 cents per gallon on diesel fuel. All revenue generated from this separate fuel tax is constitutionally dedicated to transportation purposes, including the construction and maintenance of roads and bridges.
Last fall, there was widespread opinion in Lansing that the fuel tax should be increased to fix our roads. However, there was no consensus concerning how this should be accomplished. In time, the Michigan House of Representatives and Michigan Senate put forward competing ideas on the subject. Boiled down to its essence, the Senate plan would have increased the fuel tax while leaving untouched the six percent sales tax on gasoline and diesel fuel sales. The House plan, in contrast, would have gradually increased the fuel tax but would have eliminated all sales tax on retail sales of gasoline and diesel fuel. It is beyond dispute that both plans would have raised significant revenue for roads.
But as so often happens in Lansing, the House and Senate could not agree. With the end of the legislative session quickly approaching, and no road-funding deal in place, Michigan’s legislators were up against the proverbial wall. On the final full legislative day of the year, lawmakers remained in session late into the night and passed a number of compromise bills and resolutions in the early morning hours. Certain legislators, including some members of the House, continued to favor eliminating the sales tax on gasoline and diesel fuel sales and replacing it entirely with an increased fuel tax. Other legislators, including certain members of the Senate, continued to favor leaving in place the sales tax on gasoline and diesel fuel sales. In the end, the legislators passed a law amending and increasing the fuel tax, changing it from its current form (a flat tax of 19 cents per gallon of gasoline and 15 cents per gallon of diesel) to a variable, percentage-based tax of at least 41.7 cents per gallon that would apply to gasoline and diesel fuel equally. In general, the revenue raised from this revised fuel tax would be dedicated exclusively to transportation purposes, including roads and bridges. However, for the first two years of the new tax, only the first $1.2 billion would be dedicated to general transportation purposes, and any remainder would be used for debt service on certain outstanding transportation bonds. Under any other circumstances, this law amending and increasing the fuel tax would not require a constitutional amendment or a statewide election.
Of course, Lansing has a way of making everything more complicated than it needs to be. Some legislators still favored eliminating the 6 percent sales tax on gasoline and diesel fuel sales altogether. Thus, as a compromise, the House and Senate agreed to send Proposal 1 to the voters and to tie the fuel-tax increase to the proposal’s outcome. In other words, although the increased percentage-based fuel tax has already been enacted by the Legislature, signed by the Governor, and codified in Michigan law, it will not take effect unless the voters approve Proposal 1 at the May 5th election. In an effort to garner the support of Democrats along the way, legislators also passed a bill enlarging Michigan’s earned-income tax credit for future years. Similar to the fuel-tax statue, this earned-income tax credit statute is tied to the outcome of Proposal 1, and will not take effect unless voters approve the sales-tax hike in May.
So where does this leave us? If the voters approve Proposal 1 in May, the sales tax will rise from six to seven percent on most goods, there will no longer be a sales tax on gasoline and diesel fuel sales, the fuel tax will significantly increase, the permissible uses of the School Aid Fund will be constitutionally altered, the School Aid Fund and local governments will begin to receive more funding from sales-tax revenue, and Michigan’s earned-income tax credit will be enlarged. On the other hand, if the voters reject Proposal 1 in May, the sales tax will remain at six percent across the board, the increased fuel tax will never take effect, and the road-funding debate will have to start all over from scratch.
You have to admire the strategy employed by Governor Snyder and the leaders of the previous Legislature in the wee, small hours of the morning. In designing Proposal 1 and the related package of legislation, they were careful to provide specific monetary benefits for many of the very constituencies that will be needed to ensure passage of the proposal in May. Through a careful orchestration of bills and resolutions, they guaranteed that schools, community colleges, cities and villages, county road commissions, public transportation, career and technical programs, and lower-income taxpayers will all receive a greater piece of the pie if Proposal 1 is approved. The only problem is that, by all accounts, these constituencies represent a minority of likely voters. But as we all know, it will take a majority of voters to approve Proposal 1. According to recent polls, most voters remain unconvinced.
Note: Originally published in the Mason County Press on 2/22/15