Proposal 1 would create a new wholesale fuel tax whose rate would increase based on a formula. The rate is 14.9 percent of the average wholesale price of fuel, but this rate must fall within a specified range. This range is established by the rate floor and rate ceiling, with initial rates of 41.7 cents and 46.7 cents, respectively. The rate floor would increase based on an inflation index (but only between zero and 5 percent), and the rate ceiling would always be 5 cents more than the rate floor.

Graphic 3 shows a projection over time of the minimum allowable rate floor and the maximum allowable rate ceiling. Also included are lines for what might be the typical rate floor and typical rate ceiling based on the past decade’s inflation.

Graphic 3: Projected Allowable and Average Wholesale Fuel Tax Rates, 2015-2023

Graphic 3: Projected Allowable and Average Wholesale Fuel Tax Rates, 2015-2023 - click to enlarge

Source: Author’s calculations based on Public Act 468 of 2014 and Bureau of Labor Statistics Detroit Metropolitan Statistical Area Consumer Price Index.

The mechanism created by Proposal 1 to adjust the new wholesale fuel tax rate to inflation would ensure adjustments that will exceed inflation. The process subtracts the difference between the index values for the most recent year and the cumulative changes to the rate floor, and yields a percentage increase in the tax rate that would outpace inflation.

Graphic 4 below depicts how the rate floor and rate ceiling would increase if inflation increases at a steady 1.83 percent — the average rate for the past decade. The formula would result in 1.86 percent annual increases in the rate floor for fiscal year 2017. Over time, these small increases in the rate add up to noticeable differences whereby the increases to the rates are higher than average inflation.

Graphic 4: Projected Wholesale Fuel Tax Rates Based on Average Inflation Rates, 2015-2085

Graphic 4: Projected Wholesale Fuel Tax Rates Based on Average Inflation Rates, 2015-2085 - click to enlarge

Source: Author’s calculations based on Public Act 468 of 2014 and Bureau of Labor Statistics Detroit Metropolitan Statistical Area Consumer Price Index.

But steady increases in inflation are unlikely. Graphic 5 applies the past decade’s trends of inflation into the future. In the latter years, the formula commonly produces results that will increase the wholesale fuel tax rate by the minimum and maximum amounts — no change or 5 percent — even though inflation over this period was never lower than 0.38 percent or higher than 3.69 percent.

Graphic 5: Projected Wholesale Fuel Tax Rates Based on Recurring 2005-2014 Inflation Rates, 2015-2094

Graphic 5: Projected Wholesale Fuel Tax Rates Based on Recurring 2005-2014 Inflation Rates, 2015-2094 - click to enlarge

Source: Author’s calculations based on Public Act 468 of 2014 and Bureau of Labor Statistics Detroit Metropolitan Statistical Area Consumer Price Index.

Inflation has increased by more than 5 percent in a single year. The rate floor would be limited to a 5 percent increase per year, but the formula meant to track the rate to inflation allows it to “catch up” to cumulative inflation over time. Applying the increases in inflation from 1973 to 2012 — where there was high inflation followed by low inflation — shows that the “brake” performs its function. But the difference between the statutory adjustments to inflation and actual record of inflation remain noticeable. At the end of this period, the rate floor would still be 6.7 percent higher than inflation.

Graphic 6: Projected Wholesale Fuel Tax Rates Based on 1973-2012 Inflation Rates, 2015-2055

Graphic 6: Projected Wholesale Fuel Tax Rates Based on 1973-2012 Inflation Rates, 2015-2055 - click to enlarge

Source: Author’s calculations based on Public Act 468 of 2014 and Bureau of Labor Statistics Detroit Metropolitan Statistical Area Consumer Price Index.

The inflation-based adjustments to the floor tax rate are permanent. It will increase based on inflation, but will never decrease in the event of a negative inflation rate, or deflation. If wholesale fuel prices drop to an incredibly low price of 50 cents per gallon, for example, the fuel tax would still increase according to the inflation rate. Likewise, if the price of fuel increases, the tax could ratchet up only to the rate ceiling. Thus, while this tax is billed as a “wholesale tax,” the price of fuel may not have a large influence on the level of taxation.