On Tuesday, May 5, voters will decide whether to increase the sales tax from 6% to 7%, and to change the way fuel is taxed in the state.
In addition to the sales tax increase, Proposal 1 will strip all sales tax off the price you pay at the pump. Instead, you'll pay more in the state fuel tax - money that goes into fixing our roads.
So will you be paying more at the pump? That answer is complicated. This excellent Q&A from the Freep shows examples of how prices could go up by 6 cents or 2 cents depending on the price of gas.
$2 billion in extra revenue
If Proposal 1 passes, it would raise about $2 billion for the state.
How that money would be divided up is complex.
The language you will see on your ballot is a distillation of legislation passed last December during the Legislature's lame-duck session. Democrats and Republicans were wheeling and dealing to get this passed.
Go here to take a quick look at the ballot language you'll see on May 5.
Go ahead, click the link. Then come back.
Did you see those bullet points?
We break them down here:
Bullet Point No. 1 - No Sales Tax on Gas
"The proposed constitutional amendment would eliminate sales/use taxes on gasoline/diesel fuel for vehicles on public roads."
This is breaking something down in order to build it back up.
One of the things most lawmakers could NOT wrap their ever-loving, tax-cutting minds around was the fact that they were faced with raising taxes on fuel in Michigan to get the roads fixed.
That was going to mean adding more tax onto a commodity already taxed pretty heavily in the state.
Gas taxes fluctuate, but the state of Michigan is regularly between the 5th and the 7th highest in per-gallon taxes in the country. (You can read more about that here.)
Lawmakers looked into the eyes of future voters paying higher prices at the pump, and they didn't like what they saw.
So a big part of this road funding package is stripping away one of the taxes on fuel in Michigan - and that's the per-gallon sales tax.
To visualize this, just remove the "Michigan Sales Tax" piece of the pie below:
Bullet Point No. 2 - More money for schools
"The proposed constitutional amendment would increase portion of use tax dedicated to School Aid Fund."
So strip the sales tax off of fuel - check.
But there's a catch. You do that, and you're stripping away a good chunk of money going to schools in Michigan, since most of the money collected for the 6% sales tax in Michigan goes to the School Aid Fund - a pot of money that goes to K-12 and higher education institutions in the state.
Again, many lawmakers said a cut like that to schools would not fly with them, so to make up for the money schools would lose, they decided to up the amount schools would get from the state's new 7% sales tax.
The House Fiscal Agency says the School Aid Fund would see a net increase of $292 million in the first year. The net increase would decline three years later to $200 million.
Bullet Point No. 3 - Prevent 4-year colleges from using school money
"The proposed constitutional amendment would expand use of SAF to community colleges and career/technical education, and prohibit use for 4-year colleges/universities."
The School Aid Fund was initially set up in 1994 to fund K-12 schools.
In 2011, Gov. Snyder started using School Aid Fund money to support colleges around the state. The money has mostly been used on community colleges, but some money did make its way to 4-year universities.
This part of the road funding package just makes it clear that the School Aid Fund can't be used for 4-year colleges and universities (the MSUs, UMs, and Wayne States of the world).
This would restrict the money to community and technical colleges.
Bullet Point No. 4 - Increase the sales tax
"The proposed constitutional amendment would give effect to laws including those that increase sales/use tax to 7% as authorized by constitutional amendment."
Here's where we get the extra money to offset cuts to the sales tax on fuel. Sales tax in Michigan would increase from 6% to 7%, so that $5 bucket of nails is going to cost you $5.35 instead of $5.30.
The House Fiscal Agency estimates the one percentage point increase in the sales tax (taking into account no sales tax on fuel) would bring in about $830 million in the first year.
The extra money would go to these places:
- The School Aid Fund
- Cities, villages, and townships in the form of revenue sharing
- The state general fund (part of which will be used to pay credits to low-to-moderate-income residents, see Bullet Point No. 7 below).
Go here for a more detailed breakdown of where and how the money will be spent.
Still with me? Great. Time for a quick dance break:
Bullet Point No. 5 - Raise money for road repairs
"The proposed constitutional amendment would give effect to laws including those that increase gasoline/diesel fuel tax and adjust annually for inflation, increase vehicle registration fees, and dedicate revenue for roads and other transportation purposes."
These changes are where we'll get new money for roads and transportation projects.
Increase in fuel taxes
Right now, we pay 19 cents per gallon on gas, and 15 cents per gallon on diesel in state fuel taxes. (See "State Motor Fuel Tax" in the pie chart above.)
If Proposal 1 passes, we'll pay a fuel tax that's based on a formula that includes wholesale fuel prices and inflation.
Initial fuel tax rates under this system would be 41.7 cents per gallon for gasoline, and 46.4 cents for diesel.
The Michigan Transportation Fund would see an increase of $1.3 billion per year under this new system.
Initially, the new money will be used to to pay down State Transportation Fund debt and to pay for road repairs. Here's how that will break down:
- In 2015-2016, $368 million will be distributed to state and local road agencies, while the remaining $865 million will be used to pay down debt.
- In 2016-2017, $764 million will be distributed to road agencies and $468 million will be utilized for debt pay-down.
- By 2018, all $1.3 billion will be distributed to road agencies.
Increase in vehicle registration fees
Right now, the annual registration fees we pay go down for the first three years as our car or truck depreciates in value. Proposal 1 would eliminate this, so registration fees would not go down.
This change won't apply to model years 2013 or older. It only applies to newer cars and trucks. State economists predict this will raise around $15 million in 2016, and around $62 million in 2018.
Registration fees will also go up for trucks over 26,000 pounds.
Electric vehicles will see an annual $75 surcharge, and hybrids will see an annual $25 surcharge. The lawmakers reasoned these cars still use the roads, but they use less gas, so they should add to the road funding pot in another way. Some debate that reasoning.
Bullet Point No. 6 - Rework the rules around road projects
"The proposed constitutional amendment would give effect to laws including those that expand competitive bidding and warranties for road projects."
There are several bills captured in this sentence. All having to do with how roads are built. Some of the more major elements include:
- If a township puts in 50% or more to the cost of a road project, it can require that the county road commission contract for the work on that road project through competitive bidding. Currently, county commissions can opt not to award road project contracts to the "most responsible and reasonable best value bidder."
- It will also require that MDOT develop a performance-based rating system for road maintenance services. It would create a uniform rating system for recording and monitoring infrastructure performance.
- It would also require road agencies to publicly disclose whether they have purchased a warranty for a particular road project.
Bullet Point No. 7 - Restore a tax credit for lower income people
"The proposed constitutional amendment would give effect to laws including those that increase earned income tax credit."
Gov. Snyder and Republican lawmakers reduced the state's Earned Income Tax Credit from 20% to 6% back in 2011 to help balance the budget after they cut state business taxes.
You can read more about that here.
This change would restore the credit back to the 20% level.
The restoration of this tax credit was one of the concessions Republicans made with Democrats to get this package of bills passed.
An increase in the sales tax and the fuel tax is seen as "regressive taxation" - that means those taxes weigh more heavily on people with smaller incomes.
Economists recognize that sales and fuel taxes fall more heavily on low-income people (who spend a larger percentage of their incomes on tangible goods) than on higher-income workers (who stash more of their paychecks in savings and investment accounts and spend more on untaxed services).
So restoring the EITC to the levels that prevailed before Republicans took over state government in 2010 is meant to compensate the poorest workers for the disproportionate share of the burden they'll shoulder if Proposal 1 passes.
With changes to the EITC, analysts say the entire package is a net gain for low-to-moderate income individuals. (See this infographic from the Michigan League of Public Policy.)
So there it is in a nutshell -- the seven bullet points explained!
Let us know if you have any other questions about Proposal 1 in the comment section below.
* Thanks to Ari Sandberg for research assistance on this post.