Graphic 2 below shows the estimated revenue from the proposed increase tax changes under Proposal 1 and the distribution of that revenue to different government funds and programs.

Graphic 2: Proposed New Taxes and
Revenue Distribution, 2016

Tax Increase

Estimated Revenue

Sales and Use Tax

$1,426,600,000

Wholesale Fuel Tax

$463,300,000

Commercial Truck Fees

$50,000,000

Passenger Vehicle Fee Discounts

$10,900,000

Total

$1,950,800,000

Proposed Allocation

Amount

MDOT Debt Service

$814,700,000

Michigan Transportation Fund[*]

$414,800,000

School Aid Fund

$292,600,000

Earned Income Tax Credit

$261,100,000

Local Government Revenue Sharing

$100,400,000

Comprehensive Transportation Fund

$26,900,000

Recreation Improvement Account

$24,800,000

General Fund

$15,400,000

Total

$1,950,700,000

Source: Author’s calculations based on “Transportation Funding Analysis” (Michigan Senate Fiscal Agency, Jan. 16, 2015), 23, http://perma.cc/JX4C-HQ62 (accessed March 9, 2015). Totals do not match due to rounding.

The table above shows the impact these changes will have on funding for the state’s government, but how will the measure impact Michigan residents and taxpayers?

Most Michigan residents will likely face an overall larger tax burden as a result of Proposal 1, largely resulting from hiking the sales and use tax and imposing a new and higher wholesale fuel tax. Households that plan to purchase new vehicles would also pay higher registration fees. Further, residents may see higher prices for goods and services, if businesses pass on their increased costs for paying higher registration fees and fuel taxes.

How much more a typical household would pay in sales taxes depends on the makeup and composition of the household. The state expects increasing the sales tax rate to 7 percent to generate $1.4 billion. According to the Census Bureau, there are about 3.8 million households in Michigan.[63] Assuming that the total cost of the increase in the sales tax will be borne by state taxpayers and not by businesses or visitors from out of state, the average Michigan household would pay $389 more in sales taxes in fiscal year 2016.[†]

Costs from the new wholesale fuel tax are more complex. As illustrated in a previous section, the proposed fuel tax rate would depend on inflation and the wholesale price of fuel. Projecting what consumers would eventually pay at the pump under Proposal 1 is thus contingent on unknown variables. Similarly, what consumers will pay at the pump under the current system is also affected by the future price of fuel. These facts complicate the question of how much taxpayers would actually pay in increased fuel taxes if the proposal were approved.

But generally, if Proposal 1 were approved by voters, taxpayers would pay more at the pump if the price of gasoline remains low. The federal Energy Information Administration predicts a national average pump price of $2.39 for 2015.[64] If this held true for Michigan, the proposed changes would increase the price at the pump by 10 cents per gallon (a 4 percent increase). Only when the price of gasoline at the pump exceeds $4.20 per gallon would taxpayers start to pay less in state gas taxes under Proposal 1 than they would under the current gas tax.[‡]

According to the Bureau of Labor Statistics’ Consumer Expenditures Survey, the typical household in the Detroit metropolitan statistical area spent an average of $3,067 on motor fuel and motor oil in both 2012 and 2013.[65] Using the EIA 2012 and 2013 average motor fuel prices implies average fuel consumption of 860 gallons. Based on this figure and the projected national average price of fuel from the EIA for 2015, a typical Michigan household might pay an additional $88 in fuel taxes in 2016.

A similar finding results from using different data from the U.S. Census Bureau and U.S. Department of Transportation. According to the Census Bureau, the median household in Michigan owned two vehicles in 2013, and, according to the Department of Transportation, the average vehicle consumed 664 gallons of gas in 2012.[66] Using these data with the projected EIA average gasoline prices, the median Michigan household would pay an extra $136 per year in additional fuel taxes if Proposal 1 were approved. As mentioned above, this figure would decrease with higher fuel prices and increase with lower fuel prices.

Based on these calculations, the typical Michigan household could expect an increase in state tax burdens of between $477 and $525 in 2016. This would depend, of course, on a household’s actual purchases of taxable goods.

Low-income taxpayers would see their earned income tax credits increase in this proposal. Whether EITC recipients will end up with a larger tax liability depends on their spending and income levels. According to the BLS, consumers in the lowest quintile spend 47 percent less annually than those in the middle quintile.[67] If EITC recipient households purchase the same proportion of taxable goods as the average household, they would see their sales and use tax payments increase by $205. If they own a single vehicle and consume a typical amount of fuel, they would pay $68 in increased fuel taxes.

This $273 increased burden would be less than the $342 increase to the average EITC credit. With below-average tax credits or above-average taxable spending, some EITC recipients may pay higher taxes under the proposal.


[*] This amount does not include MFT revenue transferred to the Comprehensive Transportation Fund.

[†] The tax burden from hiking the sales and use tax rate will increase based on the growth of taxable sales made in Michigan.

[‡] This would also mean that fuel would sell at wholesale for $3.60 per gallon and increase to the tax’s price ceiling the following year. The break-even point would increase annually based on the adjustments in the tax rate.