On Gov. Snyder’s Gas Tax Proposal

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

Posted in Commentary
12 comments on “On Gov. Snyder’s Gas Tax Proposal
  1. Thanks for this analysis.

    I agree, we are not cutting consumer taxes. We are simply hiding the tax in the price retailers pay. The tax will get passed on to the consumer. In fact, we are actually raising consumer taxes by applying the 6% sales tax to the consumer price, which includes the passed-along wholesale tax. Gotta love a tax on a tax.

    Before we raise taxes to increase road funding, MDOT needs to seriously look at its fat. One of my pet peeves, living in metro Detroit, is the extravagance of the “Intelligent Transportation System”. You know, those variable message signs that almost never have useful information about actual road conditions. I realize there was Federal money to install the system, but it required a state match and continues to suck up state money to keep it going. I’d rather fix a pot hole than pay for “Don’t Veer for Deer”, but I don’t want to pay extra so I can get both. ITS is a great idea the state has failed to deliver on and it’s time to pull the plug.

  2. Tom says:

    I am in my late 50s, have driven and owned cars now for over 40 yrs. For as long as I can remember, the roads here in Michigan have consistently been worse than what one would find in other states. I have seen our state go through several boon and bust cycles over this period of time and it seems no matter what the state of the economy is, how much taxes are taken in, our roads continue to stay in poor shape. I am not in favor of raising any taxes, or fees as the money never seems to reach the pavement. The only thing that happens when the government takes in more money is we the public end up with less dollars in our wallets, the money taken in just goes down the proverbial money pit, never to be seen again.

  3. Daniel G says:

    Great analysis Ed. Anytime I see a republican talk about cutting taxes I usually see that it has SOMETHING hidden in it that gets us in the end. There are NO TAX CUTS. Taxes just get moved from one place to another. Taxes are what makes us a civilization and pays for what we have. So be it.
    I agree C. Synapse. Those signs are a joke. “Don’t Veer For Deer” yeah right, I had a leaf fall on the windshield the other day driving down one of the country roads and DUCKED. Its instinctive. Do I need a sign for that? Naaa.
    I think we should RAISE taxes on the Michigan trucks that weigh any amount over the national weight laws. The 13 axle trucks that weigh 126K are the ones breaking up the roads…and the frost we have too…tax them on the axle loads. Add an axle, pay more.

  4. Diether Haenicke says:

    I’m not a fan of raising registration fees. There are apparently plenty of low income people who already drive around with unregistered vehicles. This plus some of the nation’s highest insurance rates and people burdened with driver responsibility fees they can’t pay will cause more people to drive illegally. Registration fees should be as low as possible so more people can get to their jobs without breaking the law.

    Among the ideas was to allow counties or regions (with voter approval) to levy an additional $40 per year registration fee to fund local roads. This may backfire for counties on state borders. The higher state registration fee ($120), plus local registration fee ($40), plus high insurance rates (largely caused by state mandates, I believe) would convince some people bordering on Indiana or Ohio to register their cars at a friends house out-of-state (e.g. people in Niles, Michigan registering their cars in South Bend, Indiana). This kind of behavior could cause the state to collect less money then before. The more fees are raised, the more people have incentive to try to figure out how to avoid them.

    A system tied to how much the roads are used would be better. For example, an annual odometer reading and the weight of the vehicle (or something that relates to how much damage that vehicle causes to the roads). A problem here is this would not distinguish miles traveled in the state from miles traveled outside the state, especially people who live in Michigan but work in Indiana or Ohio.

    Neither registration fees or odometer taxes collect revenue from people visiting our state. That is why putting road taxes in gasoline is better.

    If the state does not already require performance guarantees from contractors, they should start doing it. By this I mean road builders should have certain quality guarantees for the roads they build or repair and will have to make repairs at their own cost if their work does not perform (e.g. cracks in a concrete road just months later).

  5. Ed Aboufadel says:

    I can appreciate the concern that tax money raised to fix roads somehow gets wasted, and that MDOT should look at cutting some “fat” out of the system. And talking about those deer signs, if something doesn’t work, then stop spending money on it. If something does work, then that’s different.

    I haven’t studied what MDOT does with the money it gets from the gas tax, so I don’t have any proposals as to how to cut waste in that agency, or how much waste there is. Suppose the head of MDOT started an initiative to make the agency “leaner”. What would convince the public that fat has been cut?

  6. Diether Haenicke says:

    Michigan’s 14 travel welcome centers (among the 81 rest areas) are among the things funded by the state gasoline tax. The welcome centers should probably remain, but the state may want to pursue more advertising sponsorships, food concessions beyond vending machines, and other efforts to make these tourist information centers more self supporting.

    http://www.michigan.gov/mdot/0,1607,7-151-9615-60528–,00.html

  7. Diether Haenicke says:

    Not an issue of MDOT waste, but tangentially topical:

    MDOT traffic sign warns of raptors in Ann Arbor

    http://www.mlive.com/entertainment/jackson/index.ssf/2011/10/mdot_traffic_sign_warns_of_din.html

    Here’s the headline of today’s article by that idiot (Paul Morgan) at the Kalamazoo Gazette who writes daily about gas prices: “Gasoline web site predicts prices to start going up soon.” Yes, that is his article dated today, Tuesday, November 1, 2011. Even worse is it has appeared all day in the rotating “Top Stores” banner at the top of every page, not only for the Kalamazoo Gazette, but also for the Gazette’s sister newspapers across the state (Ann Arbor News, Bay City Times, Flint Journal, Grand Rapids Press, Jackson Citizen Patriot, Muskegon Chronicle, Saginaw News). That banner is the only reason I know about this latest nonsense.

    I’d post a link to Paul Morgan’s article, but if I post a second URL, I’ll have to wait for moderator approval before you can see this post.

  8. Diether Haenicke says:

    The Spike Line gas price statistics are really screwed up for Michigan today:

    The most outstanding thing is it indicates 144 (49.66%) Speedway stations went up today. That is flat out incorrect.

    It has a Speedway high of $3.799. According to Speedway’s website, all of their 287 stores are at or below $3.499, except for $3.559 in Kimball. The displayed Speedway low of $3.169 is correct.

    The non-Speedway prices seem largely correct. The statewide low of $3.149 is what GasBuddy currently displays for Reese, which is east of Saginaw. Sturgis is right behind with $3.169 to $3.199 at 7 locations. Your high is $3.599, which is largely correct, if the BP next to Detroit Metro Airport at $3.899 is thrown out in addition to BP’s in Lansing and Trenary at $3.699 and $3.629.

    So, it looks like somehow the wrong price was read for Speedway’s high end.

  9. Diether Haenicke says:

    8:18 a.m. EST Monday

    The spike line was not updated Friday. Chicago spot market gasoline increased Friday 6.16¢ (2.34%) to $2.6934. This puts the Michigan spike line at $3.377144. With the average of all Michigan gas stations currently standing at $3.350, we’re due for a reset to $3.559 in Michigan today or tomorrow.

    With Kalamazoo/Portage gas prices currently at $3.219 to $3.399, this will be an increase of 16-34¢.

    With Grand Rapids area gas prices currently at $3.279 to $3.429, this will be an increase of 13-28¢.

    Current averages:

    $3.429 USA
    $3.398 Lansing
    $3.391 Ann Arbor
    $3.350 Michigan
    $3.347 Detroit
    $3.326 Grand Rapids
    $3.321 Flint
    $3.283 Kalamazoo

  10. Diether Haenicke says:

    9:58 a.m. Monday

    100% correct prediction for me. $3.559 is Speedway’s new price in Michigan today.

    Normally, the first report out of the Grand Rapids area does not occur until after 11:00 a.m. Today, the first report in the state came out of Wyoming:

    9:44 Wyoming, Byron Center Ave. & 44th St.
    9:49 Saline, E. Michigan Ave. & Harris St.
    9:51 South Lyon, Pontiac Trl. & Nine Mile Rd.
    10:07 Holland, S. Washington & W. 33rd St.
    10:12 Portage, W. Milham Ave.

    As of 10:06 a.m., Speedway’s website showed the following locations at $3.559:

    * Holland, 461 Butternut Dr.
    * Holland, 365 Butternut Dr.
    * Fraser, Utica Rd.
    * Lansing, E. Jolly Rd.
    * Kimball, Range Rd.
    * Wyoming, Byron Center Rd.

    New York gasoline for December delivery is up 5.04¢ this morning to $2.7138.

  11. Ed Aboufadel says:

    I was driving around until 1:30PM today in Kentwood, and I didn’t see $3.55 anywhere. I was going to post tonight predicting a hike tomorrow, but I now I know I was too late.

  12. Diether Haenicke says:

    Tuesday 10:09 a.m.

    Chicago gasoline for immediate delivery closed up another 6.48¢ yesterday to $2.7582. If that price doesn’t come down this week, it’s conceivable we could have a second reset on Friday.

    The lowest price reported yesterday in Kalamazoo/Portage was $3.219 at several locations on Gull Rd. Today, the lowest reported price is $3.499. The Kalamazoo average (which includes everything west to Paw Paw and north to Plainwell/Otsego) has increased 26.6¢ to $3.549.

    The lowest reported price yesterday in the Grand Rapids area was $3.279. Today, the lowest reported price (excluding Costco) is $3.319 at a Clark on Division Ave. at 52nd St. in Kentwood. Knowing some Clark stations have a lower price for cash, it is possible that is a cash-only price. It is possible the Family Fare on Gezon Pkwy. in Wyoming at $3.329 has the lowest credit price. The Grand Rapids average has increased 22¢ to $3.546.

    Here are the other average increases:

    up 22¢ – Flint – was $3.321 now $3.541
    up 16.2¢ – Michigan – was $3.350 now $3.512
    up 13.6¢ – Lansing – was $3.398 now $3.534
    up 13.5¢ – Detroit – was $3.347 now $3.482
    up 12.9¢ – Ann Arbor – was $3.391 now $3.520
    up 1.3¢ – USA – was $3.429 now $3.442

1 Pings/Trackbacks for "On Gov. Snyder’s Gas Tax Proposal"
  1. [...] by the amount of the wholesale tax passed to him? As the Brits would say, not bloody likely. While this proposal is initially revenue-neutral for the gas tax, a percentage tax on wholesale fuels will go up as prices rise. The proposal includes another [...]

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