Improving the state’s roads is critical to economic growth in Michigan. Not only do people depend on the roads and public transportation to get to work, but businesses—and potential businesses—rely on safe roads to transport goods. It is imperative, however, to ensure that people can still afford to get to work if taxes are increased.
Michigan’s roads desperately need repair. Every year Michigan drivers spend an average of $357 on unnecessary repairs to their vehicles due to damage from deteriorated roads.1 Gov. Snyder has indicated that to address the problem, the state needs to dedicate approximately $1.4 billion, and failing to do so will increase the cost to $2.6 billion annually by 2023.
A number of revenue raising proposals have been suggested. Each of these will impact those earning low wages the most. Increasing the wholesale gas tax, however, would be the least harmful. Increasing the sales tax to generate revenue for roads would further increase the negative effect on struggling people in the state. Restoring the Earned Income Tax Credit (EITC), and ensuring that part of the solution is to increase investments in public transportation, would lessen the negative impact on low- and moderate-income working people, making it easier for them to get to work and support their families.
Increasing the Sales Tax Harms People
One proposal would increase the general sales tax and earmark a portion of those revenues for roads. That raises two concerns:
- Increasing the sales tax would have a harmful effect on low-income working families.
- Dedicating a portion of sales tax revenues to transportation limits the Legislature’s ability to use those funds for other programs and services that might be needed in the future.
The general sales tax is already considered to be the most regressive state tax, consuming nearly 3% of family income for the poorest 20% of families (incomes under $16,000) while only 0.5% for the top 1% on the income scale (income over $331,000). For the average household in the bottom 20%, the annual cost would be about $261.2
The sales tax is a broad-based tax that is used to generate revenue for a wide range of public services. Almost three-quarters of sales tax revenue in fiscal year 2013 went to fund education while a small portion (less than 1%) supported public transportation. With historically low levels of General Fund revenue and following a decade of cuts, dedicating a portion of sales tax revenues for roads would further limit the Legislature’s ability to use those revenues for other critical programs and services, including public schools and public safety.
Replacing the Flat Gas Tax With A Wholesale Tax on Gas
Another proposal to raise funds for roads would replace the current flat gas and diesel taxes with an adjustable rate based on the 12-month average of the wholesale price of gas. Because the flat gas tax rate (19 cents per gallon) has not increased since 1997, it has lost its purchasing power. The wholesale gas tax would rise over time as the price of gas increased, providing a more stable source of revenue for transportation.
While any increase in taxes will have a negative impact on low-income individuals and working families, replacing the gas and diesel flat taxes with a tax based on the wholesale price of gas would likely have the least harmful effect, especially if coupled with other policies to offset the financial burden faced by those working for lower wages. General sales taxes are based on a percentage of the price of a large range of taxable items whereas excise taxes are imposed on a small number of goods and are determined by volume rather than price, like per gallon on gasoline. Recent estimates reveal that while the bottom 20% of earners pay 3% of their income in general sales taxes, they pay less (2.3%) in other sales and excise taxes (i.e., gas, cigarettes, and beer). For the next 20% in income, the difference is even more significant.
Offsetting Recent and Potential Tax Increases
The tax shift of 2011 increased taxes on individuals by 23%, or $1.4 billion, mostly through the elimination of various tax credits and exemptions that were meant to help households earning the least. The reduction in the Earned Income Tax Credit alone increased taxes on low-income workers by approximately $247 million in 2012.3
According to a recent report, over 40% of Michigan households earn too little to provide for basic needs.4 These households include those who are working and still struggle to make ends meet.5 A single parent can spend up to 11% of their income on transportation, whereas a two-parent household with one adult worker can spend up to 18% of their household income.6 Any additional tax increase is likely to increase the number of struggling families in Michigan, which is why it is important to offset any new tax.
Other states with gas taxes that adjust to the cost of transportation have recognized the need to make their gas tax less regressive by combining various tax credits. In Michigan, the EITC is one of the most effective ways to support working families and lift them from poverty. It is already in place and could be expanded, making it the best vehicle for protecting low-income working families from rising taxes. In addition, there are many low-income families that could benefit from improved public transportation systems. Therefore, investing in public transportation as a part of the road funding solution mitigates the impact on low-income working families.
Road funding proposals should make it easier, not harder, for workers to get to their jobs.
- “Michigan Transportation by the Numbers: Meeting the State’s Need for Safe and Efficient Mobility,” TRIP, January 2014.
- Calculation is based on an average income of $8,700 for this group as reported by the Institute on Taxation and Economic Policy, “Who Pays? A Distributional analysis of the Tax Systems in all 50 States, 4th Edition.
- Jason Escareno, “Cuts to Michigan EITC Raise Taxes on Working Families,” Michigan League for Public Policy, April 2014.
- “ALICE, Asset Limited, Income Constrained, Employed, Michigan: A Study of Financial Hardship,” United Ways of Michigan, September 2014.
- These households that are working, often more than one job, but still struggle to meet basic needs have been termed ALICE (Asset Limited, Income Constrained, Employed).
- “Making Ends Meet in Michigan: A Basic Needs Income Level for Family Well-Being,” Michigan League for Public Policy, March 2014.