Executive Summary*

Voters will be asked to approve or reject Proposal 1 on May 5, 2015. There are many facets to this proposal — it would make four changes to the Michigan Constitution, and it is “tie-barred” to eight legislative bills that would only take effect if voters approve of the proposal. Central to these changes is increasing taxes to pay for additional investments in road building and maintenance.

The two most significant proposed changes to the state constitution are increasing the limit on the state sales tax rate from 6 percent to 7 percent and exempting fuel purchased for use by motor vehicles on public roads from the state sales tax. Tie-barred legislation would immediately hike the sales tax to the new limit of 7 percent, and this tax increase is expected to generate $1.427 billion new revenue in fiscal year 2016. Other constitutional changes include prohibiting public universities from receiving revenue out of the state’s School Aid Fund and earmarking a portion of the state’s use tax revenue for the School Aid Fund.

If Proposal 1 is approved, tie-barred bills would create a new and higher wholesale tax on fuel, increasing the current state excise tax of 19 cents per gallon of gasoline (15 cents for diesel) to 41.7 cents per gallon starting Oct. 1, 2015. This new tax is expected to generate $1.24 billion in new revenue in 2016.

The new wholesale fuel tax rate of 41.7 cents per gallon will increase according to a formula, which is based in part on inflation and the average wholesale price of fuel. A rate floor and rate ceiling would be established, which would limit how much this rate could increase year to year. However, the mechanics of the formula ensure that the rate floor will increase above inflation.

Although fuel purchases would be made exempt from the state sales tax, taxpayers can expect to pay more in gas taxes in the immediate future if Proposal 1 is approved. The federal Energy Information Administration projects the national average price of gasoline to be $2.39 through 2015. If this were to hold true for Michigan, the proposed new wholesale fuel tax would increase the price of gas at the pump by 4 percent, to $2.49 per gallon. Only when gas prices at the pump exceed $4.20 per gallon would taxpayers begin paying less in fuel taxes under Proposal 1.

Proposal 1 would also increase vehicle registration fees. Currently, registration fees for new cars are reduced by 10 percent each year for the first three renewals. Those discounts would be eliminated, generating $10.9 million for the state in 2016 and $150 million by 2026.

Other legislative changes that will go into effect if Proposal 1 were to be approved include adding $40 million to the state’s public school “At Risk” program, creating new regulations for the Michigan Department of Transportation and boosting the state’s earned income tax credit. Increasing the earned income tax credit will reduce state revenue by $261.1 million in 2016.

Based on data from the U.S. Census Bureau, Department of Transportation and Bureau of Labor Statistics, the typical Michigan household could expect to pay between $477 and $525 more in state taxes in 2016 as a result of Proposal 1. What taxpayers can expect to pay in increased taxes beyond that will depend on the average wholesale price of fuel, inflation and the growth in purchases of taxable goods. The average EITC recipient household may see its total state tax burden reduced by about $69, but nevertheless, some EITC recipient households may still pay more in state taxes as a result of Proposal 1.

Voting “yes” on Proposal 1 will amend the Michigan Constitution and put into effect the tie-barred legislation described above. Voting “no” will reject both the changes to the constitution and the series of tie-barred bills, and send policymakers back to negotiate over future road funding.

* Citations provided in the main text.