Michigan Legislators Extend State’s Gasoline Tax

Published November 1, 2004

Michigan lawmakers overwhelmingly approved a two-year gasoline tax extension on September 28, even though the reason for the tax no longer exists. House Bill 6074, which authorizes the extension, calls for the creation of a committee to study how to spend the approximately $100 million the seven-eighths cent-per-gallon tax will generate. Without the extension, the tax would have expired at year-end.

The seven-eighths cent-per-gallon tax is one of several taxes on gasoline in Michigan. The Senate’s approval came on a voice vote. It followed an 87-13 vote of approval in the House on July 14.

Governor Supports Extension

A conference committee of House and Senate members is expected to iron out differences between the two versions, or the House could concur with the Senate version, before the legislation goes to Gov. Jennifer Granholm (D).

Last summer Granholm proposed extending the tax to help the state close budget gaps, so she is expected to sign the legislation into law.

State Rep. John Moolenaar (R-Midland) was one of the House members who opposed the bill.

“I felt the tax was intended to clean up underground fuel tanks. Now it has moved more to a slush fund to balance the budget,” Moolenaar said. “I believe the legislature has a responsibility to exercise proper oversight of funds and use them for their intended purposes when it is a dedicated fund.

“People who voted for the tax are concerned about the budget and the deficit, but one of the ways we got into this budget situation is that we haven’t exercised state spending controls,” he said. “This expands that problem.”

The timing could hardly be worse. Gasoline prices remain high, and many economists are blaming elevated energy costs for slowing the economic recovery. Michigan’s economy is already lagging the rest of the nation, and legislators’ willingness to extend the tax–effectively a tax hike–comes on the heels of an announcement that the Greektown Casino in Detroit will lay off 180 employees because of a casino tax hike passed during the summer.

Program Went Bankrupt a Decade Ago

Michigan instituted the gasoline tax in 1989 to pay for the cleanup of leaking underground petroleum storage tanks. The intended beneficiaries were “mom and pop stores” and other small businesses, some of which were confronted with cleanup costs for underground tanks left behind by prior property owners.

But larger corporations that also had legitimate claims to the money were first to apply for the assistance. By the time most of the small businesses for which the program was designed submitted their financial requests, the cleanup fund financed by the gasoline tax had gone bankrupt.

A 1993 state audit of the program showed $110 million had been received but $250 million had been spent. The program was declared insolvent in 1995.

The bankruptcy was no surprise. Legislators knew the tax would not generate enough money to fully pay for the program, but they lacked the political will to impose a gas tax large enough to properly fund it. (I know this from firsthand experience, as I was deputy director of the Michigan Department of Natural Resources and then director of the Michigan Department of Environmental Quality during these years.)

Fraud charges also dogged the program. Many allegations centered on contractors who reportedly were paid for work they did not perform. Few of the allegations resulted in criminal charges, though, because the state lacked the resources to conduct field-compliance inspections.

In 1994 the legislature extended the gasoline tax another 10 years, to provide revenue to pay off bonds issued to cover cleanup claims. No new claims have been filed since June 1995.

Today there is more than enough money in the fund to pay off the bonds.

Tax Extension Sets Precedent

State Rep. Bruce Caswell (R-Hillsdale) opposed the legislation and said he believes Michigan legislators have made a mistake supporting the gasoline tax extension.

“My opposition was based on the feeling that, for the first time, we are using a tax on gasoline to pay for general fund operations. That is a bad idea,” Caswell said. “I think if we’re going to tax gasoline, the money should be going for transportation or fuel spill cleanups. I don’t believe we should be using a tax on gasoline to fund the general fund.”

Russ Harding ([email protected]) is senior environmental policy analyst for the Mackinac Center for Public Policy.