The voices of Tax Policy Center's researchers and staff
Michigan was one of 12 states that saw gas taxes increase on July 1. Its rate climbed by only 0.1 cent per gallon because it’s indexed monthly for inflation. In contrast, new legislation doubled gas tax rates in Illinois to 38 cents per gallon and raised the levy by 10.5 cents in Ohio.
Can Michigan—and other states—go even bigger? Michigan’s Democratic Governor Gretchen “Fix the Damn Roads” Whitmer hopes to raise an additional $2.5 billion annually by boosting our 26 cent per gallon gasoline tax by 45 cents, with three 15-cent increases spread between October 1, 2019 and October 1, 2020. The revenue would be constitutionally required to fund infrastructure.
We all want to fix the roads. But, as in Washington, we don’t agree on how to pay for it.
So far, Michigan’s GOP lawmakers have not offered an alternative infrastructure funding plan, either through revenue measures or spending cuts. The legislature needs to pass a budget by October 1.
The Republican-led legislature argues that Michiganders can’t afford the “job-killing” 71-cent eventual tax. And the politics are clearly difficult. A recent poll found only 14 percent of Michigan residents said increasing the gas tax is the best of seven possible options for raising $2 billion for roads and bridges. However, 50 percent favored some type of tax or fee increase, and only 8 percent said Michigan should not spend any money additional money on transportation.
Deputy State Treasurer Jeff Guilfoyle acknowledges that “nobody wants to pay 45 cents more a gallon...But, the reality is, if you don’t raise that much money the roads get worse. If you raise a lesser amount of money you are slowing the rate of decline of the roads, which has some merit, but you aren’t making the roads better.”
What’s a driver to do, other than dodge potholes and cross fingers when crossing bridges?
Michigan, arguably the state with the worst roads in the union, needs revenue. So do the 28 other states that have raised their motor fuel taxes since 2013, often on both gasoline and diesel fuel.They’ve had to, in part because Congress has not raised federal motor fuels taxes since 1993 and isn’t likely to do so anytime soon.
Many states are in a bind because the cost of road repairs is growing faster than revenues from current fuel taxes. Revenues are stagnant because total gas consumption was flat over the past 15 years: We’re driving less and using more fuel-efficient cars. And if drivers are not purchasing more gasoline, then gas tax rates either have to climb or take a different form just to maintain revenue levels. But as my TPC colleague Richard Auxier explains, “legislators are not inclined to raise rates very often or by very much.” Michigan at least indexes its gasoline tax to inflation, but general price increases tend to be well below the cost of constructing or maintaining roads.
Could drivers afford a steep gas tax increase?
Opponents of a big increase in the gasoline tax correctly note it is a regressive tax, placing a disproportionate financial burden on those with lower incomes.
But Whitmer tries to address this problem by cutting other taxes for low- and moderate-income households. When fully phased-in, her gas tax increase would cost the average Michigan driver $23-a-month. But she’s also proposing to expand the state’s earned income tax credit (EITC), from 6 percent of the federal EITC to 12 percent, which could reduce taxes for some low- and moderate-income families by $30-a-month.
Could a steep gas tax increase hurt a state’s economy?
Could a steep gas tax hike cost jobs? The conservative Mackinac Center for Public Policy says Whitmer’s tax increase would result in the loss of 22,500 private sector jobs and the gain of 6,300 government jobs. Michigan State University Economics Professor Charles Ballard says its job loss projection is “greatly overblown.” Ballard noted, for example, that when the gas tax is fully implemented, construction companies could hire more people to work on road projects.
The US Chamber of Commerce—a business advocacy group that reflexively opposes nearly all tax increases—has called for a 25-cent increase in the federal gas tax, currently stuck at 18.4 cents per gallon. It argues that the infrastructure improvements that could be funded by a higher fuels tax would boost economic growth.
Absent a federal gas tax increase, what alternatives does a state have?
In March, the Whitmer administration suggested six other ways Michigan could fund its infrastructure needs, including:
- Raising the state’s flat individual income tax rate from 4.25 percent to 5.3 percent
- Raising the corporate income tax rate from 6 percent to 19.5 percent
- Raising the sales and use tax rate from 6 percent to 7.4 percent (requiring a constitutional amendment)
- Levying a new statewide 7-mill property tax (requiring voter approval)
- Increasing annual vehicle registration fees by 180 percent.
There have been no takers for any of these alternatives, but in late May, Michigan’s Republican Senate Majority Leader seemed open to further discussion. “I give my governor credit for the courage to offer [the gas tax increase]. Because I think sometimes that's what leadership is about — setting something out there that is maybe difficult to achieve, but it gets the ball moving.”
Michigan’s GOP Speaker of the House, however, isn’t so complimentary. He maintains that "The people of the state of Michigan can't afford a 45-cent gas tax increase and because of that, the people don't support it. So that's not going to be a part of the conversation moving forward.”
In the meantime I’ll just keep dodging potholes, with fingers crossed.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Mike Groll, File/AP Photo