Friday, October 28, 2011, 9:45AM: At the beginning of the week, I was contacted by a local media outlet for my analysis of Gov. Snyder’s proposed change to the gas tax. When I received the e-mail, I didn’t even know there was a proposal coming. Now, at the end of the week, the Governor has given his speech and I can say a few words about what he wants to happen. The key is to understand what we mean by the wholesale price of gas. To do so, let’s review how I calculate expected gas prices in Michigan.
There are two prices that could be called “wholesale prices”, and the first is available publicly on the Internet in a variety of places, such as here and here . The latter is a better number because it is based out of publicly-traded markets in Chicago, while the former comes from New York. Last night, for instance, that wholesale number was about $2.70 per gallon. These public markets are where the price of gas is set!
Now, we take that price and add in 18.4 cents for the Federal per gallon gas tax, and another 2.6 cents for miscellaneous charges (e.g. transportation), so that gets us to $2.91. Now, recent communications I have had with a retailer suggests that there is another 10 cents of miscellaneous charges in there to pay for storage, etc., so that gets us to $3.01. This is a second price that could be called a “wholesale price”, and we are getting close to what the retailers pay to buy gas for their stations. Gov. Snyder’s proposal is to apply a percentage tax to one of these wholesale prices instead of a flat 19-cent per gallon state tax, and he says, “I propose we eliminate the current gas tax on consumers” and apply it to producers or retailers instead. He also says that based on current prices, the tax would be revenue neutral. What are the implications of these statements?
Based on current prices (see this spreadsheet for my calculations), a wholesale gas tax of 6.7% on the Chicago price or 6.0% on the price to retailers would be revenue-neutral. For either situation, in our example, the retailer would pay $3.19 a gallon. Then, on a price hike day, you add 10 cents or so profit and the 6% sales tax, and you get a price of $3.49 a gallon, which is what we are paying this morning for gasoline.
So, in terms of “eliminating the current gas tax on consumers”, of course the new wholesale tax would be passed on to the pump price, and we still have the 6% sales tax that we are paying, so I don’t think there is much to that.
In terms of revenue collected, I believe that currently the 19-cent per gallon tax goes to roads while the 6% sales tax goes to the general fund. If the proposal is passed, then the wholesale tax will go to fixing roads. If the price of gasoline goes down, then Michigan will collect less than 19 cents per gallon. If the price goes up, then Michigan will collect more than 19 cents. For example, if the price of gas returns to $4.25 a gallon, then the State would collect 9 more cents per gallon.
Based on past history, during recessions, gas prices fall, so the tax collected per gallon will fall, and during boom times, gas prices rise and the tax collected per gallon will rise. So, the economist in me says that the new wholesale tax will provide the acceptable result of an economic stimulus during poor economic times (by lowering taxes) and a gentle break during great economic times (by raising taxes). Consequently, during economic booms, the State should save a lot of the gas tax money for a rainy-day roads fund, and then spend that money during recessionary times to fix roads and create road construction jobs.
The politician in me sees this as a way to implement a reasonable tax policy without getting into fights every few years about raising or lowering the gas tax. Every few years, politicians won’t have to take the blame for raising the gas tax, or take the credit for lowering it. Gov. Snyder pretty much says this in his speech.
There is another issue here. As automobiles use less gasoline per mile (due to improvements in efficiency and the increasing use of hybrid and electric cars), the gas tax is doomed to collect less total revenue over time, no matter what the price of gas does. I think this is the rationale for raising the annual registration fee — this fee will balance out the loss of tax dollars from the gas tax. What’s funny, though, is that those who drive hybrid and electric cars are and will continue to pay less tax per mile than the people who drive gas-powered vehicles. And it seems that miles driven should be a better way to measure road use than gallons of gas burned. Consequently, perhaps the annual registration fee for hybrids and electric cars should be higher!
Because I am a middle-of-the-road Democrat, I am not going to rant about starving the government and freedom from taxes. In my opinion, the proposal from Gov. Snyder is reasonable starting point for discussion, but I don’t buy the we-are-cutting-consumer-taxes argument. At the same time, I can see why members of his party are not enthusiastic — after raising taxes on citizens and cutting revenues to schools in colleges in order to cut taxes for businesses last year, this proposal could be described as “more new taxes on the citizens of the State”. At least in this case, though, “revenue for roads” is a trade-off I’m willing to consider (if I was asked). –Ed Aboufadel