Michigan’s public schools could collect more state tax dollars than originally projected if voters approve a sales tax increase on the May 5 ballot, and if the price of fuel stays at its current low level. The ballot measure is part of a “just fix the roads” initiative that increases taxes by some $2 billion overall, of which $1.2 billion would go to roads.

The complex package would remove the sales tax from fuel purchases (the proceeds of which do not go to roads), and simultaneously impose a 22.7 cent per gallon increase in the gas tax, and a 26.7 cent per gallon increase in the tax on diesel. (These amounts then increase over time with inflation.)

At higher prices the provision exempting fuel from sales tax would largely offset the gas tax hike, but that doesn’t happen when fuel prices are low.

Simply put, an exemption from the 6-percent sales tax saves taxpayers 18 cents per gallon when gas costs $3, but just 12 cents per gallon when the price falls to $2. In contrast, the fuel tax increases are not affected by the per-gallon price.

Most sales tax revenue is earmarked to schools, and the Senate Fiscal Agency originally calculated that if the May 5 ballot measure passes, schools would gain $336.5 million. But these calculations were based on gas selling for $2.75 a gallon. If gas prices are lower, the arithmetic changes and schools will get even more.

Regular gas averaged $2.11 per gallon in Michigan on Feb. 2. A year ago, the average was $3.26 per gallon. The average gas price statewide has been under $3 since early November.

Here are the additions and subtractions that amount to more money than first projected for schools:

If the sales tax goes from 6 percent to 7 percent, it will deliver an additional $708.6 million to public schools next year. They will also get an extra $151.1 million from a provision earmarking more “use tax” revenue, and another $44 million from a new “Amazon tax” on Internet purchases, enacted to get more legislative votes for the ballot initiative.

On the other side of the ledger, if gas returns to $2.75 per gallon, then schools would have foregone $567.1 million from exempting fuel purchases from the sales tax. But when gas costs just $2.00 or $2.25 per gallon, the amount of foregone revenue is significantly less. 

The bottom line is that lower fuel prices now mean public schools would get an even larger proportion of the “just fix the roads” tax increase than originally projected, and taxpayers will be worse off than projected by an equivalent amount.

(Editor's note: This story has been changed to include comments by Gov. Rick Snyder Spokesman Dave Murray).

The ballot proposal that goes before Michigan voters on May 5 includes a “double tax” on fuel purchased for uses other than driving on roads, including for boats, snowmobiles, off-road vehicles and possibly agriculture. Some Lansing insiders have known about the problematic wording for weeks, and while few will talk about it on the record, it has attracted much attention among those in the know.

“It’s right there; all you have to do is be able to read,” a well-placed source said under the condition of anonymity.

Officially dubbed Proposal 2015-1, the ballot measure is the road funding deal Gov. Rick Snyder and the Legislature reached at the end of a lame duck session last December. Voters will have the final say in a statewide election.

The proposal would be a $2 billion tax hike in its entirety, but that number does not include the “double tax” potential, since it is not reflected in the analysis done by the Senate Fiscal Agency.

The deal has two main components. First, a constitutional amendment would increase sales and use taxes from 6 percent to 7 percent, collecting an additional $1.427 billion from taxpayers. If this is approved it will automatically trigger a $663 million net increase in fuel and vehicle registration taxes. The second component, dealing with fuels, has two parts. It would exempt fuel purchases from sales and use taxes — this money is not currently used to support roads — and increase the motor fuel tax.

(The sales tax increase is a constitutional amendment originally called House Joint Resolution UU. It was approved by the Legislature in December with the two-thirds supermajority required under the Michigan Constitution to place it on the ballot. The sales tax exemption for fuel purchases was in House Bill 4539, passed at the same time. It and the fuel tax hike only go into effect if voters approve the sales tax increase.)

Under the actual wording of both the sales tax increase and the new motor fuel sales tax exemption, fuel purchases would only be exempt from the sales and use taxes if they were used to operate vehicles on public roads or highways. In other words, some fuel would be subjected to both sales tax and the much higher gas tax.

The problematic language in the ballot proposal states:

“No sales tax or use tax shall be charged or collected from and after October 1, 2015 on the sale or use of gasoline or diesel fuel used to operate a motor vehicle on the public roads or highways of this state.”

This would mean fuel purchased for boats, snowmobiles, and ORVs would still be subject to sales and use taxes, on top of the increased motor fuel tax. It is estimated that 2 percent of all gasoline sold in Michigan is used for those and other recreational uses. More fuel is used for agriculture and other non-road uses.

“I don’t think it’s fair to have boaters pay the sales tax in addition, if that is in fact the way this is going to be done,” said Eric Foster, owner of Belle Maer Harbor in Harrison Township, the state’s largest marina.

There has been speculation that if the state were constitutionally permitted to collect this “double tax,” it could require gas stations to install special fuel pumps that collect the higher amount on those purchases. Other insiders, though, say they doubt the proposal language would lead to that, but do fear that tax collectors would eventually seek to collect the extra levy in other ways.

“The constitutional change only exempts fuel for vehicles that travel on the roads,” said James Hohman, assistant director of fiscal policy with the Mackinac Center for Public Policy. “Those purchasing fuel used for other purposes would have to look for exemptions elsewhere because it isn’t part of the package.”

Patrick Anderson, of Anderson Economic Group, said even people who find other exemptions to avoid immediately paying the “double tax” might not be altogether in the clear.

“This would be an automatic invitation for the IRS,” Anderson said. “It is always the personal property deductions or exemptions that attract its attention.”

Gongwer News Service, a Lansing-based political newsletter, has reported that the Snyder administration will seek legislation to correct the problem. However, if the May 5 ballot proposal is approved by the voters, the double tax language would be in the state constitution, which could only be amended by another ballot proposal.

On Tuesday, Feb. 10, Michigan Capitol Confidential sent an email that included three questions about the “double tax” to Dave Murray, spokesman for the governor, and to the office of Lt. Gov. Brian Calley, which often deals with technical issues involving taxation. The email also asked that the questions be responded to by noon Wednesday.

The questions were as follows:

Question 1: How would this be administered?

Question 2: What assurance could voters receive that – immediately or in the future – the state would not pursue ways of collecting the sales tax on fuel purchases for purposes other than the use of vehicles that travel on roads?

Question 3: If Proposal 2015-1 passes, thus amending the Michigan Constitution, how could the lack of the sales tax exemption for non-road-use fuel purchases be corrected?

According to Murray, there is no risk of double taxation and there never has been.

“There was not a mistake, and the administration and lawmakers were aware of the situation you described in December,” Murray said. “There always have been plans to address this legislatively. There are some issues that are appropriate to include in the state constitution, and others that are best spelled out in a bill. The nature of fuel taxation makes it more appropriate for the details to be addressed in legislation.”

“The expected legislation will include that the sale of any fuel from the pump (gas or undyed diesel) will not include sales tax,” Murray continued. “That fuel will continue to be subject to the motor fuel tax, which was amended in December to be calculated based on the wholesale price. Transactions that are currently eligible for a refund of the motor fuel tax will continue to be eligible for a refund.  And the tax treatment of dyed diesel will continue unchanged.”

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See also:

Michigan's May Tax Proposal

Projections Show Schools Get More Even With Road Funding Shift

State Revenue Increasing by $640 Million

Despite GOP Dominance, Michigan Budget Keeps Growing by Billions

State Budget Has Increased Almost $5 Billion the Past Three Years

Budget Watchdog: State Has Billions In Unbudgeted Costs

If Sales Tax is Passed, Michigan Would Have the Second-Highest in the U.S.

$2.1 Billion in Michigan Budget Reforms