News Story

Lower Gas Costs Benefit School Funding in May 5 Ballot Proposal

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.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.