Choice Between Two Tax Hikes No Choice At All

In pursuit of more money for road improvements — something Mackinac Center analysts and others do not oppose — Lansing politicians are offering Michigan residents a Hobson’s non-choice between higher taxes and higher taxes. A real choice would involve raising taxes and cutting state spending by an equal amount while redirecting that money to roads. We have addressed the subject of road repair and funding before at great length, and recently in this essay.

The proposal comes in the form of a constitutional amendment (“Plan A”) that would increase the sales tax rate to 8 percent, with the extra revenue earmarked to replace the current 19 cent gas tax and 15 cent diesel tax. Several other new Senate bills have been introduced that would constitute “Plan B” should voters reject the constitutional amendment. These bills involve raising fuel and vehicle registration fees.

Reportedly, the package is modeled on the 1994 Proposal A property tax cut-and-cap measure, which used a similar ploy of offering voters two unpalatable alternatives (the “Plan B” in that case was a big income tax hike). Unlike the current proposal, however, Proposal A represented a complicated tax shift, not a huge tax hike.

Under the “Plan A” 8 percent sales tax increase, Michigan would also occupy an unenviable No. 1 position: According to the Washington D.C.-based Tax Foundation, we would have the nation’s highest state sales tax rate (higher rates are imposed in some municipalities).

The “Plan B” proposed tax hikes are nothing if not ambitious. One bill would replace the current motor fuel tax with a new wholesale levy initially imposed on gasoline at a rate of 37 cents per gallon — a 16 cent increase. When added to federal fuel taxes, and the 6 percent state sales tax that is also imposed on fuel purchases (revenue from which does not go to roads), this would give Michigan the nation’s highest total gasoline tax levy at nearly 74 cents per gallon, (assuming current wholesale and pump price levels of around $2.74 and $3.50, respectively). New York is currently the top gas tax state at 69 cents per gallon.

The good news is that Plan B is much closer to a true “user fee” for roads. The bad news is that it is still a net tax increase. To date, no offsetting reductions in state spending and taxes have been proposed. When considered in light of another recent proposal, the tax package raises additional questions.

The Senate Finance Committee has recently advanced a bill that would deduct the value of trade-in vehicles from the sales tax imposed on new car purchases. When fully phased-in this would represent a $226 million tax cut; presumably senators have identified an equivalent amount of budget cuts to offset the foregone revenue. While this would be lovely for new car dealers, and those who buy a new car in any given year, if the need for revenues is so desperate wouldn’t it make more sense to use this money for road repairs?

Sen. John Proos, R-St. Joseph, has introduced legislation (Senate Bill 6) that would earmark some sales tax revenue now spent on other things to roads. This one change could get the state about 9 percent of the way to the lower bound of the estimated funding goal.

And then there are other spending cut opportunities. A few years ago the Mackinac Center identified billions of dollars in hundreds of ideas for potential budget savings that could be realized by adopting various policy reforms. Some of these have been implemented, but many are still available — such as eliminating the Michigan Economic Development Corp. Just ending the 21st Century Jobs program and redirecting Indian Gaming monies would free up more than $100 million for transportation.

To repeat, everyone would like to see more money invested in Michigan roads. But net tax increases should be the last resort, not the first. Moreover, without offsetting cuts in other impositions, increases of the magnitude proposed would significantly raise the state’s overall per capita tax burden. That could undo some of the progress made in the past two years at reversing the economic devastation of Michigan’s recent and unlamented “lost decade.”

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