Friday, August 01, 2008

Driving Down - Taxes Down?


I received this as part of a response from the COO of the Michigan Department of Transportation on a traffic management issue:

With regard to your comment about the amount of revenue generated from the windfall gasoline sales tax, there is a misconception that higher gasoline prices results in more tax revenue for MDOT. However, studies have shown that people tend to drive less miles, drive more fuel efficient vehicles, use public mass transit, and increase carpooling in order to save money. Therefore, less gasoline is consumed which, in turn, yields less tax revenue for the state.
Let's do the math using national average gasoline prices:
  • July 2006 - gasoline prices peaked near $3 per gallon
  • July 2007 - gasoline prices again peaked near $3 per gallon
  • July 2008 - gasoline prices peaked near $4.10 per gallon - up about 33%
  • In Michigan sales tax revenues on gasoline increased 33% [slightly less than 6 cents per dollar]; gasoline taxes remained constant per gallon [Michigan has two taxes on gasoline]
  • Let's presume a hefty 10% drop in gasoline consumption over one year due to less driving and more efficient vehicles versus 1% overall nationally *.
  • Then, with a 10% decline in gasoline sales, the State of Michigan received
    - 19 cents per gallon gas tax plus
    - 22 cents per gallon [effective rate at $4] sales tax ** or
    - 41 cents per gallon total state taxes versus 35 cents per gallon total state taxes when gasoline was $3 per gallon yielding only 16 cents per gallon sales tax
  • 41 cents per gallon is 17% more total state taxes per gallon in 2008 than 2007 which more than offsets even a 10% decrease in consumption
Looking at it in dollars and cents, if [for example only] the state collected taxes on 100 million gallons in 2007, the total state gasoline taxes would have been about $35 million. If consumption were reduced to 90 million gallons [10% reduction], total state taxes would have been $36.9 million or an increase... overall... of 5.4%.

Now the person at MDOT who responded may have been sincere in his belief that the state was collecting less gasoline taxes, but unless the decline in consumption was significantly more than 10%... it does not compute!
What is the case, however, is that the State is not making all of those taxes available to MDOT for transportation maintenance and improvement. Who's to say where the money goes once it's in the State's coffers?

Actually, Jack McHugh of the Macinac Center for Public Policy had some answers to that:
Bruce - the truth is even uglier than you imagined: Not a dime of sales tax on gasoline goes to transportation funding in Michigan. To add insult to injury, the sales tax is imposed on the 18.4/24.4 cents per gallon fed gas/deisel tax - a tax on a tax - (but not on the state 19/15 cent per gallon gas/diesel tax).

Check out this bill analysis of a relevant bill for some useful numbers and background:

Bottom line - there is a windfall to the state - to schools, actually, which get 73 percent of sales tax revenue, and local rev sharing, which gets 10 percent ( but transportation funding is a loser.
So, as drivers, we pay more gasoline taxes on a percentage and absolute basis and we get in return:
  • traffic signals that cannot be properly maintained and timed to save us gasoline
  • roads and bridges that are in disrepair reducing our safety and comfort
  • higher maintenance and repair bills from our vehicles bouncing through bad pavement and rocks in our windshields
U.S. gasoline consumption [million barrels per day]:
2005 - 9.16
2006 - 9.25
2007 - 9.29
2008 - 9.20 est. [1% decline overall] - source U.S. Energy Information Agency

** Michigan Sales Tax. Michigan's sales tax is 6%. Retail gas stations do not pay sales tax on the 19 cents per gallon state road tax included in the price of a gallon of gasoline but do pay on the federal tax of 18.4 cents. The calculation of the state sales tax portion of the cost of a gallon of gasoline is complicated because the sales tax for gasoline, unlike the sales tax for other products, is already included in the posted retail price. The ultimate total sales tax paid by the station is calculated by taking the retail price per gallon minus 19 cents (state road tax) divided by 17.67 (the denominator that accounts for the fact that sales tax is already included in the posted retail price).


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... and one could add "not all human problems really are."
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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)