Driving Down - Taxes Down?

SEARCH BLOG: GASOLINE TAX

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: http://www.legislature.mi.gov/documents/2005-2006/billanalysis/House/htm/2005-HLA-4204-4.htm

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 (http://www.legislature.mi.gov/documents/2005-2006/billanalysis/House/htm/2005-HLA-4204-1.htm) 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

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* 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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