Michigan Proposal 1 Is Going To Fail at the Ballot: It is a Political Bait and Switch

Michigan's Proposal 1 is off and running.

MI 14th Democratic Congressional District Meeting 4.11.2015

Unfortunately, it does not look like it is going very far.

Yesterday, thee Policy and Resolution Committee held an extremely spirited discussion on the pros and cons of voting for Michigan Proposal 1, which is suppose to raise thee sales tax by 1%, the first time in many, many years.

Michigan Proposal 1 of 2015

Description and preliminary analysis of Senate and Bolger Proposals:

No bills have been introduced but the Bolger plan has been described in the press as a six-year phase-out of the sales tax on gasoline and a six-year phase-in of a six-percent tax collected on the wholesale price of gasoline.

He also proposed converting the current 19-cents-per-gallon gas tax to a percentage-based tax at the wholesale level of 7 percent, the 6 percent tax could be added on over six years. That would raise the overall fuel tax to 13 percent and raise an estimated $1 billion more annually for roads. It is not clear what if any changes would be made to the diesel tax.

The Senate plan, HB 5477 (S-13) and HB 5493 (S-1), would change the current 19 cent per gallon gas tax and the current 15 cents per gallon diesel tax to a single rate that would change annually. The rate would be determined by MI Department of Treasury by multiplying the average wholesale price as defined in the bill by the applicable percentage as defined in the bill.

The applicable percentage would be 9.5% beginning 5/1/2015; 11.5% beginning 1/1/2016; 13.5% beginning 1/1/ 2017; and 15.5% beginning 1/1/2018 and thereafter. The average wholesale price would vary within limits established in the Bill.

The additional transportation revenue generated is estimated to be $182.8 million in 2015 and increase each year, and be an additional $1,768.6 million by 2023.

In addition, HB 4630 (S-3) would make numerous changes to ad valorem registration taxes. These changes would increase transportation revenue by $14.6 million in 2016 and increase revenues each year until additional revenue reached $103.7 million by 2020.

The Senate proposal does not affect SAF, GF, or constitutional revenue sharing, whereas the Bolger proposal reduces available revenue for all three.

A 10-year analysis of the Bolger plan: Indicates that if the plan had taken effect in 2004, the growth in the School Aid Fund (SAF) would have been only 0.8% from 2004 to 2013. This compares with actual growth of 6.2%. (See attached table)

The General Fund (GF) growth rate would have been reduced from 6.6% to 5.6%. The change in constitutional revenue sharing revenue would have been reduced from a 7% increase to a 4.5% decline.

In 2013, the total loss to the SAF, GF and constitutional revenue sharing would have been $849 million. The additional gas tax revenue would have been about the same amount, $846 million.

It should be noted that the results would be much worse if the program started during a recession. For example, if the plan had started in 2008, the SAF loss would have increased from a decline of 2.1% to a decline of 7.6%, and the total revenue loss would have been about $1 billion compared with an $846 million increase in the gas tax.

The loss to the SAF would have been $739 million (or about $500 per pupil) in 2013 (10-year analysis), which is a significant enough loss, but even more so in light of recent history. From 2000 to 2013, SAF revenue declined by 15.5% adjusted for inflation.

As a consequence many school districts have serious financial problems. In 2013, more than 50 districts ran budget deficits.

A 10-year projection of the Bolger plan, based on 2015-2024, estimates a SAF revenue loss of about $800 million per year when the proposal is fully phased-in in 2020. A loss of $800 million equates to a per-pupil loss of about $500 per pupil by 2020 and thereafter.

The analysis assumes a 1% annual decline in gasoline consumption, a 5.0% annual increase in gas prices, and a 3.5% annual increase in SAF revenue. The Bolger plan would reduce the growth rate of SAF revenues from 2015 to 2024 by about 10%.

Growth Comparisons

From 1995 to 2013, the sales (and use) tax increased at an annual rate of 2.15%.

From 2000 to 2013, the sales and use tax increased at an annual rate of 0.8%. Over the same period the sales tax on gas increased at an annual rate of 6.96%. This rapid increase was due to a 129% increase in gas prices. Gas consumption fell about 10%. The sales and use tax excluding gas increased at a rate of 0.26% from 2000 to 2013.

A 1.0 % increase in the sales tax (excl. gas) would raise $1.24B (based upon 2013 data).  The sales tax on gas (and diesel) generated $1.01 Billion in 2013.

Stability of the Bolger proposal:

The overall sales tax is more stable than the sales tax on gasoline. The gas tax tends to be volatile. For example the sales tax on gasoline increased 10.6% in 2005 and fell 29% in 2009, and increased18.9% in 2010. In comparison sales tax collections less gas increased 1.7% in 2008, fell 6.9% in 2009, and increased 3.7% in 2010.

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