Gov. Gretchen Whitmer proposed a fuel tax to raise funds for statewide road repair. The tax exclusively targets vehicles with internal combustion engines (ICE) but also effectively raises the ownership fees for electric vehicles (EVs). Experts debate the policy’s effect on taxpayer equity, environmental sustainability, and economic growth. The State Legislature appears unlikely to pass the current draft.
Poor road conditions cost Michigan motorists an average of $686 per year in vehicle repairs. Insurance fees, lost productivity, and other factors raise the cost to $1,980. Studies point to underinvestment in infrastructure. The State ranks No. 42 in road expenditures per vehicle miles traveled. It funds road maintenance through the Michigan Transportation Fund (MTF), which is financed by fuel taxes and vehicle registration fees. The revenue source has seen little growth over the years. Registration fees have risen proportionately with vehicle values, but until 2015, fuel taxes had never been adjusted for inflation and had not increased since 1997. The State had issued bonds to offset funding deficiencies; the Michigan Department of Transportation (MDOT) is now paying down $1.2 billion in outstanding debt.
In 2015, Michigan approved a $1.2 billion-per-year funding package for road and bridge repair. A five-year phase-in began in 2017. The plan included a 7.3-cent increase in gas taxes to 26.3 cents, an 11.3-cent increase in diesel fuel taxes to 26.3 cents, a $20 hike in registration fees, and a $600 million allocation from the general fund. It also indexed the fuel tax for inflation; effective in 2022, the tax will rise annually by either 5% or the inflation rate, whichever is lower. MDOT said the 2015 plan has slowed road deterioration but cannot solve the state’s infrastructure problems. Studies suggest the roads need another $2 billion to $2.6 billion annually.
Fuel Tax Proposal
To fill the funding gap, Gov. Whitmer proposed raising fuel taxes from 26.3 cents to 71.3 cents. The increase would be phased in with 15-cent hikes in October 2019, April 2020, and October 2020. Inflationary indexing would begin as planned in 2022. Whitmer expects $2.5 billion in gross annual revenue from the new tax beginning in 2021. The sum would be apportioned to a new Fixing Michigan Roads Fund ($1.9 billion) and restoration of the general fund ($600 million). The proposal eliminates the general-fund earmark for roads and restores $500 million siphoned from the School Aid Fund.
Those who oppose the plan point to its impact on Michigan’s at-pump taxes, which would become the highest in the nation, according to the Tax Foundation. Michigan fuel taxes are compounded by a 6% sales tax. The additional 45-cent-per-gallon excise tax would raise the average at-pump tax from 44.13 to 89.13 cents per gallon. For a 15-gallon tank, the total tax increase would cost an extra $7.16 per fill-up.
Whitmer’s plan would also indirectly raise registration fees for battery electric vehicles (BEVs) and hybrid electric vehicles (HEVs) to the highest rates in the country. The Michigan Vehicle Code ties each one-cent increase in fuel taxes to a $5 increase in BEV fees and $2.50 increase in HEV fees. For a 45-cent fuel raise, EV owners would pay an extra $102.50 to $225. The average ICE vehicle that gets 27 miles to the gallon could travel 13,500 miles before breaking the BEV rate. Since the average U.S. driver travels 13,476 miles annually, the proposed tax appears to draw comparable contributions from the average BEV and ICE owners. Altogether, EV fee increases are expected to generate $3 million in new revenue.
Five years into Whitmer’s 10-year road plan, a commission would be appointed to examine the market share of fuel-efficient and electric vehicles. The commission would explore fuel-tax alternatives to capture an evolving tax base.
Industry Impacts — The Michigan Petroleum Association and Michigan Association of Convenience Stores say the average gas station will pay an extra $1,125 per day in taxes. This figure represents the statutory tax incidence, not the economic incidence. Gas is a relatively inelastic good, which means consumers would bear more of the tax burden than gas stations would. The associations also expect consumers to offset higher gas expenses by cutting spending in station convenience stores. Station owners record higher margins from commodities than fuel, so lost store sales could hurt operations. Consumers near state borders are predicted to escape the tax altogether by buying gas in Ohio and Indiana. Washtenaw County commuters may similarly pursue substitutes; they can avoid the fuel tax by biking or electric scootering. These changes in consumer behavior would hurt local gas stations.
Economic Impacts — Road improvements are expected to increase travel efficiency and reduce vehicle-repair expenditures across Michigan. These factors free up consumer time and resources for discretionary spending. The economic benefits could be offset by the fuel tax increasing business transportation and distribution costs. Rising input costs would yield higher prices for consumer goods and services, which could hamper the broader consumer spending and decrease Michigan’s national price competitiveness.
Environmental Impacts — The tax could help reduce Michigan’s carbon emissions by inspiring drivers to cut consumption or purchase more fuel-efficient vehicles. However, the University of Michigan Energy Institute expects rising registration fees to disincentivize purchases of cleaner vehicles. This would undermine carbon-reduction efforts. Policy proponents argue the $225 fee increase is minimal.
Equity Impacts — The policy mitigates negative effects on low-income motorists by doubling the Earned Income Tax Credit from 6% to 12%. In the near term, though, high-income earners may escape fair contributions to the road-repair fund and shift the cost burden onto low-income earners. As EV prices remain prohibitively high, EV ownership may be the exclusive privilege of high-income drivers. After about 13,500 miles, ICE drivers would pay higher annual taxes per mile than their EV counterparts would. Low-income motorists would effectively subsidize the road use of high-income drivers. Some experts propose an electricity use tax as an equitable alternative to charging static EV registration fees.
The Michigan House Speaker and Senate Majority Leader (both Republicans) acknowledge the need for road repair but oppose the fuel tax. They propose to fund roads with revenue from the existing sales tax on fuel. That revenue currently supports schools and local governments. Whitmer is willing to negotiate on other budget points, including a GOP-opposed business tax, to advance her fuel tax proposal as is.