Despite having one of the highest gas tax rates, Michigan’s roads are amongst the worst in the nation. In fact, Michigan received a grade of D+, according to the American Society of Civil Engineers’ infrastructure report card, released in March 2018. Even worse, Michigan’s roads and stormwater management systems tied for the worst grade, each receiving a D-.
Michigan’s excise tax rate is 26.3 cents per gallon for gasoline and diesel fuels, according to the American Petroleum Institute. This ranks Michigan 25th in the country. Further, Michigan is one of only seven states that also apply a sales tax to gasoline purchases, which is added on top of state and local motor fuel taxes.
In 2019, Michiganders paid the 9th-highest combined local, state, and federal gas tax in the nation. In 2017, the Wolverine State’s tax rate was increased to the current rate, with automatic annual inflationary adjustments beginning in 2022. Despite the recent and future tax hikes, Democrat Gov. Gretchen Whitmer proposed a massive tax increase that would nearly triple Michigan’s gas tax, adding another 45 cents per gallon.
Announced in early March, the hike would consist of three 15-cent increases from October 1, 2019, to October 1, 2020. Supporters estimate the hikes will generate $2.5 billion annually in revenue, which would be directed to the new Fixing Michigan Roads Fund and dedicated to essential road repairs. If approved, Michigan’s gas tax would become the highest in the country.
However, these tax hikes would come with a steep cost. To estimate these effects, the Mackinac Center used its State Tax Analysis Modeling Program, or STAMP, to measure its impact on the economy. STAMP estimates the hikes would cost “more than 22,500 private sector jobs and raise just under $2.5 billion annually by fiscal 2022. It would also increase government employment by 6,300 jobs.”
Moreover, increasing gasoline taxes is a regressive form of taxation that will likely leave transportation systems shortchanged. In 2015, Daniel Vock, writing for Governing, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes failed to keep up with inflation and fuel-tax-related revenue has dramatically dropped.
In recent years, the rise of fuel-efficient cars has decreased motor-fuel-tax coffers and disproportionately shifted the burden to low-income drivers, who typically own older, less-fuel-efficient vehicles.
Wendell Cox and Ronald Utt argue gas taxes have a more detrimental effect on lower- and middle-income families than they do on the wealthy. Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family. On the other hand, a tax hike would raise prices on goods and services throughout the economy because virtually all consumer goods are transported using gasoline-powered vehicles. Businesses will simply pass the added costs on to consumers.
Michigan legislators should explore modern and efficient ways to fund road construction and traffic infrastructure, such as privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing—varying toll prices based on congestion—to manage demand and limit traffic problems.
One reform that merits consideration is limiting the use of gas tax dollars to transportation projects. Wasteful spending is an issue that has long plagued transportation funding. Bloat, inflated labor costs through prevailing wage laws and project labor agreements, and inefficient bureaucratic agencies often inflate the costs of new infrastructure projects far above initial estimates.
The following documents provide additional information about how motor-fuel taxes are applied and the impact they have on states’ economies.
23rd Annual Highway Report on the Performance of State Highway Systems
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, deficient bridges, traffic congestion, and fatality rates.
State Motor Fuel Taxes
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).
Alternatives to the Motor Fuel Tax
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when designing alternative revenue sources.
Designing Alternatives to State Motor Fuel Taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes in world in which more fuel-efficient vehicles are rapidly becoming available. They also report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
In this paper from the Tax Foundation, Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation projects.
Research & Commentary: Congestion Traffic Pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.
Raising Gas Taxes Won’t Fix Our Bridges
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, a state government relations manager at The Heartland Institute, at [email protected] or 757/354-8170.