Most analyses of the gasoline tax issue which rank Michigan among the lowest five states for gasoline taxes fail to take into account Michigan's sales tax.
The state fuel tax for gasoline and diesel is based on a 15 cents per gallon charge. However, a 6 cent discount for commercial users of diesel fuel limits the effective diesel tax to 9 cents per gallon. In order to qualify for the discount, in-state commercial users must buy a $92 permit for each truck, while out of state registered trucks must pay $25 per truck. There is also a 6% state sales tax on gasoline and diesel fuel. In addition, there is an 18.4 cent federal gasoline tax and 24.4 cent federal diesel tax per gallon. This brings total gasoline and diesel effective fuel taxes to 33.4 cents per gallon plus the sales tax.
Each penny of state gasoline tax is estimated to raise approximately $45.7 million of revenue, while each penny of diesel tax raises between $5.6 and $6.9 million.8 Michigan's gas tax was last increased in 1983 and 1984 when an extra 4 cents per gallon (36.4%) was added in two 2 cent increments. The state diesel tax has remained at 9 cents per gallon since 1980 when the 6 cents per gallon discount was instituted.
Michigan's state fuel tax rates before sales taxes and other add-ons are considerably lower than those assessed nationally and in some neighboring states. Table 1 provides a summary of state and federal gasoline and diesel tax rates per gallon in Michigan, nationally, and for some neighboring states, both before and after sales tax and other add-ons. For instance, in 1993 the national average state gasoline and diesel tax rate was 19.1 cents per gallon before any add-ons for sales taxes or other per gallon fees.9 In Ohio the rate was 21 cents for gasoline and diesel in 1993, and in Illinois the rate was 19 cents and 21.5 cents. However, in Indiana the gasoline rate was just 15 cents per gallon, identical to Michigan's rate, and diesel was taxed at 16 cents per gallon.
The other key point is that, unlike many states making up the national average, Michigan also assesses a sales tax of 6% on gasoline and diesel sales prices including the federal taxes. After taking into account this tax, Michigan's taxation of gasoline is slightly higher than the "without add-ons" national average. For instance, assuming a dollar per gallon gasoline price, Michigan's 6% sales tax adds 6 cents per gallon to gasoline. This brings Michigan's effective state gasoline tax to 21 cents per gallon, slightly above the national average state gasoline volume tax. On diesel fuel, the sales tax adds an effective 6.0 cents per gallon, bringing Michigan's tax to an effective 15.0 cents per gallon. This is 4.1 cents per gallon below the "without add-ons" national average.
However, some of our neighboring states also apply a sales tax to gasoline purchases. Indiana has a 5% sales tax on the base price of gasoline excluding federal and state taxes, and this tax adds 3.3 cents per gallon. This brings Indiana's total state taxes per gallon on gasoline to 20 cents per gallon, similar to Michigan's current tax on gasoline. Illinois has a 6.25% sales tax on the base price of gasoline and this adds 4.2 cents per gallon, for a total per gallon state tax of 23.2 cents per gallon. This tax is 2.2 cents per gallon greater than Michigan's tax. Ohio does not have a sales tax on gasoline so its total state tax rate per gallon is 21 cents, identical to Michigan's 21 cents.
For diesel, the neighboring states have a variety of polices regarding sales taxes or other per gallon fees. In Indiana the effective diesel tax is 27 cents per gallon after inclusion of an 11 cents per gallon surcharge on for-hire motor carriers (companies trucking their own goods on their own trucks do not pay this surcharge), almost double Michigan's level. Indiana exempts for-hire motor carriers' trucks from the sales tax, but other trucks must pay the, sales tax. In Illinois the effective diesel tax is 31.6 cents per gallon, including a "Part B" tax rate on the average retail pump price excluding federal and state taxes, and a 5.9 cents per gallon surcharge on motor carriers. The resulting Illinois tax is more than double Michigan's level. In Ohio there is no sales tax; however, motor carriers of all types pay an additional 3 cents per gallon bringing the total charge to 24 cents per gallon for diesel, some 9.0 cents per gallon higher than Michigan's charges.
Even though the Michigan sales tax is not used for transportation purposes, it nonetheless is a cost for users that must be taken into account when making comparisons. It should also be noted that a number of other states do dedicate at least a portion of their sales taxes on fuel to transportation purposes. Most analyses of the gasoline tax issue which rank Michigan among the lowest five states for gasoline taxes fail to take into account the sales tax.