Currently, the state assesses both an excise tax (19 cents for gasoline, 15 cents for diesel) and a 6-percent sales tax on the purchase of fuel.[36] Proposal 1 would repeal and replace these fuel taxes with a new “wholesale” tax levied at 41.7 cents per gallon initially.[37] This new tax is estimated to bring in $463 million more than the current taxes assessed on fuel would in fiscal year 2016. The actual amount this new tax will raise, however, varies depending on the price of fuel.[38]
Taxpayers would pay the same in fuel taxes if the pump price of gasoline increases to $4.20 per gallon. The federal Energy Information Administration estimates the national average gasoline price to be $2.39 in 2015.[39] At this price, taxpayers would pay 10 cents more per gallon in taxes, a 4 percent increase. This tax would go into effect on Oct. 1, 2015.
The new wholesale tax would increase over time based on a formula. The rate is set by multiplying 14.9 percent by the average wholesale price of fuel.[*] The rate, however, must fall between the minimum “rate floor” and the maximum “rate ceiling.” The rate floor would start at 41.7 cents per gallon and then adjust annually based on inflation, limited to a maximum inflation-based increase of 5 percent.[40] In the event of negative inflation rates, or deflation, the rate floor would not change.[41] The rate ceiling would always be five cents more than the rate floor.[42] Based on this design, the maximum amount this wholesale tax could increase annually is five cents more than a rate floor that increased by 5 percent.[†]
However, the increase to the rate floor will be higher than inflation based on the way that it was legislated. The first increase will occur on Oct. 1, 2016, and will be based on the change in the inflation rate from the period of July 2013 to June 2014 through July 2015 to June 2016.[43] The initial rate adjustment, then, will be based on two years’ worth of inflation. Subsequent increases are based on one-year changes to the inflation index. However, changes build upon each other, ensuring that the tax rate will increase above inflation. For more details about the rate floor, rate ceiling and allowable tax rates, please see Appendix B: Allowable Wholesale Fuel Tax Rate Projections.
The initial rates set by the tie-barred legislation are set based on the average wholesale price of fuel of $2.80 per gallon.[‡] To illustrate how the formula would work, consider the following scenarios for fiscal year 2017, assuming a 2 percent average annual inflation rate:
[*] The average wholesale price of fuel would be determined based on a 12-month average from the period July 1 to June 30 each year. “Public Act 468 of 2014” (State of Michigan, Jan. 12, 2015), sec. 2(b)–(c), http://perma.cc/95VH-H3UH (accessed March 17, 2015).
[†] For example, based on the initial rate of 41.7 cents per gallon beginning in October 2015 and running through fiscal year 2016, this new tax rate could not be more than 48.8 cents per gallon in fiscal year 2017, no matter how much the average wholesale price of fuel increases.
[‡] This would be gasoline that sells at the pump for $3.35 per gallon, with 18.4 cents in federal excise taxes, 19 cents in state excise taxes and 18 cents in state sales taxes.