News Story

Just In Time For 2021 Inflation Spike, Michigan Gas Tax Getting Cost-Of-Living Increase

Levy was approved in 2015 when annual price increases were still modest

Michigan taxpayers concerned about the toll inflation may inflict on their household budgets are about to discover a fresh new source of it: a cost-of-living allowance baked into the state’s motor fuel tax levy. Beginning Jan. 1, 2022, the state’s gas tax will begin what could turn out to be stiff annual increases pegged to the rate of inflation.

The inflation-based trigger was part of a 2015 legislative deal. It included a motor fuel tax increase of 7.3 cents per gallon, a hike in the annual vehicle registration (license plate) tax, and an earmark of some state income tax revenue to road repairs. The deal was passed by the Republican-controlled legislature and signed by Republican Gov. Rick Snyder.

The size of the January 2022 fuel tax increase will depend on how much the consumer price index has risen between Oct. 1, 2020, and Sept. 30, 2021. The increase is capped at 5%, even if actual inflation is higher.

The current state gas tax is 26.3 cents per gallon. If 2021 inflation is 5% or more, then the fuel tax will be increased to 27.7 cents per gallon. It will have a 5.3% increase due to a rounding provision specified in the calculations.

If, by the end of September, the annual inflation rate ends up similar to that of the previous six years, the gas tax would rise from 26.3 cents to 26.8 cents per gallon. That would be a 1.9% increase.

But changes in the consumer price index have been running hot all year. This may well bring the annual increase close to the 5% maximum, if not higher. At that rate, Michigan motorists would pay $76 million more in the state gas tax each year, starting in 2022.

Motorists here already pay the 18.4 cent per gallon federal gas tax. Michigan fuel purchases are also subject to the 6% state sales tax. When the various charges are added together, Michigan drivers already pay the nation’s 10th highest gasoline tax.

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.