Vote NO on Proposal 1 on May 5, 2015

I was going to wait a few more weeks to write about Proposal 1 that is on the May 5, 2015 Special Election ballot, but the Ann Arbor City council has a resolution to support Proposal 1 on their March 16 agenda, so now is the time.

Red_CheckmarkOn May 5. 2015 in a statewide special election, voters will decide whether to raise the sales tax from 6% to 7% and to change the way the fuel tax is calculated. This proposal is in response to deteriorating road conditions in Michigan.  The fuel tax has not been increased for nearly 20 years, so our tax revenue for road repair has been inefficient at best.  Almost everyone believes that we need to increase tax revenue in order to fix our deteriorating roads.  The question for voters is really about how to go about increasing that revenue.

This is a very complicated proposal that I feel is not the most practical or efficient way for repairing our roads.  I believe that many are not looking at the details of the proposal and think that the end justifies the means.  But what if the means are bad for the state and the residents in the long run?  What if the end is not what you expected?  Will our roads get repaired ASAP or in 5 years?  Will road repair be prioritized once more fuel tax revenue is collected?  Lets see.  There is a lot of info to go over so lets start at the beginning.

Ballot Language

Here is the actual ballot language you will see on your ballot.

PROPOSAL 15-1

A proposal to amend the State Constitution to increase the sales/use tax from 6% to 7% to replace and supplement reduced revenue to the School Aid Fund and local units of government caused by the elimination of the sales/use tax on gasoline and diesel fuel for vehicles operating on public roads, and to give effect to laws that provide additional money for roads and other transportation purposes by increasing the gas tax and vehicle registration fees.

The proposed constitutional amendment would:

  • Eliminate sales / use taxes on gasoline / diesel fuel for vehicles on public roads.
  • Increase portion of use tax dedicated to School Aid Fund (SAF).
  • Expand use of SAF to community colleges and career / technical education, and prohibit use for 4-year colleges / universities.
  • Give effect to laws, including those that:
    • Increase sales / use tax to 7%, as authorized by constitutional amendment.
    • Increase gasoline / diesel fuel tax and adjust annually for inflation, increase vehicle registration fees, and dedicate revenue for roads and other transportation purposes.
    • Expand competitive bidding and warranties for road projects.
    • Increase earned income tax credit.

Should this proposal be adopted?

YES [] NO []

Taxes

state sealLets break this into parts so you can actually understand what is happening here.  Currently we have a state sales tax of 6%.  We pay this sales tax on everything including fuel.   The only exceptions are for food and prescriptions.  The revenue generated by the state sales tax is constitutionally earmarked for the following:

  • School aid fund ~75%
  • General Fund ~15.9%
  • Local Revenue Sharing ~10%
  • Transportation Fund ~1%

That means we cannot use sales tax revenue for anything else, including fixing the roads.

Michigan has a state fuel tax of  19 cents  per gallon on the purchase of gas.  This tax can be and is used to repair and maintain the roads.  However, the amount was set almost 20 years ago and it has not kept pace with  the demand for repairs in our aging infrastructure.

There is also a 18% Federal excise tax on fuel that I won’t really refer to because nothing in the proposal will actually affect that tax as far as I know.

The Proposal

Decision-MakingThe Michigan legislature’s did not opt for the simplest solution of just raising the gas tax to cover the badly needed road and infrastructure repairs. Their reasoning is that it was just too big an increase for one tax (the fuel tax).  Instead they came up with a very complex plan that distributes an even higher increase between 2 different taxes ( the sales tax and a reformulated fuel tax).2  

The first step in their plan is to eliminate the sales tax on gas/fuel.  Why?  This tax was not going to fund road repair anyway.  They would then replace the flat 19-cents per gallon tax that we pay now, with an initial 41.7-cent per gallon fuel tax based on a formula that includes wholesale fuel prices and inflation..  Yes that is 41.7 cents…a 22.7 cents difference.  That might seem like a lot but isn’t.  Remember that the fuel tax is a flat tax per gallon and the sales tax that it replaced was a percentage.  A simple example is this

Old system:  $2.50 / gallon + 6% sales tax ($0.15) + $0.19 fuel tax =$2.84
New system:  $2.50 / gallon + $0.417 fuel tax = $2.92

Old system:  $4.50 / gallon + 6% sales tax ($0.27) + $0.19 fuel tax =$4.96
New system:  $4.50 / gallon + $0.417 fuel tax = $4.92

 There really is no noticeable effect at the pump for the consumer when the new formulation is initiated.   It appears that we are paying the same taxes that we paid before, but this new tax no longer includes the 6% sales tax.  It is a hidden tax increase until inflation rises and thus the fuel tax increases. Only then will people recognize the tax increase.  Nonetheless, we should have more tax money at the end of the day dedicated to repairing roads and infrastructure.

The problem with this part of the proposal is how they are calculating the 41.7 cents fuel tax.  I have looked everywhere for a real calculation but came up empty.  The best I could find to explain the new formula is this description in the Free Press 2 :

 “the fuel tax would be tied to a complex formula that pegs it to the Consumer Price Index, a common measure of inflation. The minimum fuel tax could never rise more 5 cents per gallon over the rate of inflation (which is also capped, under the formula, at 5% a year). But the fuel tax rate would never go down, even in the unlikely event that the inflation rate is negative.”

It will be impossible to ever predict what the future price of gas and the fuel tax will be.   Depending on inflation we could have a very  volatile tax.  Although consumers won’t notice a a tax increase in the beginning, as inflation rises the gas tax rises.  However there is a cap on gas taxes to prevent gas tax decreases in the case of deflation.  This new fuel tax can go up and up, but will NEVER go down.

There is no certainty with this plan.  Other states have done this but not with great success.  Massachusetts  implemented a 2013 transportation law designed to help fuel tax revenues keep up with inflation and then revoked it in November of 2014.  The residents were not happy with it and wanted the legislature to vote on increases every year instaed.   I agree with this.  The legislature should have to do their job and if the residents want their roads fixed then, they have to agree to pay for them and support their legislators who cast votes for tax increases.  I would gladly pay for this same increase if it was just a simple hike in the fixed gas tax /gallon and not linked to inflation.

Consequences

consequencesSo in a convoluted way, this new gas tax formula will technically give us more tax money  to fix our roads.  But in doing so, the legislature has just created a dire situation with the Michigan State budget.  It eliminated the 6% sales tax on fuel that used to go to the schools, the general fund, and the local municipalities.  That is a huge hit on the budget.  So now we have the second part of our tax increase.  The legislature is asking you to raise the sales tax from 6% to 7% in order to replace the lost revenue from the elimination of sales tax on fuel.

But I ask you, why do we need to eliminate the sales tax on fuel at all?  There are 9 states including Michigan that impose some state sales tax on gasoline (CA, CT, GA, HA, IL, IN, MI, NY, VA).  Michigan is not alone in this.  Charging sales tax on fuel is not prohibited or negative in any real way.  Why fix a system that is not broken?   We could raise the 19-cents per gallon gas tax to maybe, 30 cents per gallon and still keep the 6% sales tax.  After all buying fuel is a purchase.  It makes sense.

The issue lies with how the conservatives define gas taxes.  Currently Michigan has a total tax of 41.4 on fuel purchases, but only 19-cents is a fuel tax, the rest is state sales tax (6%) and federal taxes (18%).  When Michigan is reported on in the media though, Michigan has the 6th highest fuel taxes in the nation because they use the 41.4% number which includes the sales tax.  Conservatives have many voters convinced that our taxes are higher than most other states, when that is completely not true.  We cannot fix our roads right now because we are actually underfunded compared to most other states.  Paul Egan of the Free Press reported it this way:3

Of the 41.4 cents in state taxes Michigan motorists pay on a gallon of fuel, only 19 cents is a fuel tax dedicated to transportation. The other 22.4 cents is all sales tax, and under Michigan’s constitution, most of it goes to schools and local governments and very little of it can be spent on roads.
Remove that 22.4 cents from the equation and Michigan’s 19-cent fuel tax ties with Arizona for ninth-lowest among the states.
“Including the sales tax skews Michigan tremendously,” said Jeff Cranson, a spokesman for the Michigan Department of Transportation.
“It’s very disingenuous of the AFP (Americans for Prosperity, an anti-tax group) and others to make the point about what we spend on fuel taxes without noting that as a matter of public policy, our state decided to use sales tax on fuel to fund other things so what you pay at the pump is not a true user fee for roads.”

Here is a table of the actual fuel rates that each state charges.  Click  in upper right corner to zoom in or pop out (enlarge).

gas_rates


source: www.taxpolicycenter.org

As you can see, Michigan clearly has a much lower fuel tax then described.  It is disingenuous for politicians to declare that Michigan has a high fuel tax when we don’t and it is even more disingenuous when they claim that our fuel tax is not spent on the roads.  Our sales tax is not spent on the roads because it is not supposed to be, the fuel tax of 19 cents per gallon is.

So now you are being asked to raise the sales tax to replace the sales tax revenue on fuel that will be lost when they rework the fuel tax formula.  This new complex formula is not needed or necessary.  Remember they could have just simply raised the 19 cent per gallon fuel tax and kept the sales tax.  This new complex formula is only being used to disguise the tax increase initially while convincing you that you are choosing to raise sales taxes to cover the schools, the general fund, and local municipalities.  Reality is that we are replacing the elimination of the fuel sales tax with an increase of sales tax overall.

A problem I have with it is this.  Sales tax on fuel purchases is more likely to be more consistent that sales taxes on other purchases.  When you are using the sales tax to fund schools and such, consistency is good.  When the economy is down, people cut back on many things, shop less, eat out less, etc.  Fuel purchases are the last thing they cut back on.  After all we still have to drive to work.  We will be trading a consistent level of tax revenue for tax revenue that is not predictable and could decline at any time.  Although, they say that the 1% increase in sales tax should cover the elimination of the 6% tax on fuel, it is riskier to rely on a sales tax system that is based on retail sales that can decrease at any time for any reason.

A much better way to raise revenue in a more consistent manner would be to raise the income tax instead of relying on a retail sales tax.

Why an increase in the sales tax is a bad idea

decision-making-process1So now you might be saying to yourself,

‘so what, I want the roads fixed.   I am willing to pay more to fix the roads and allow a sales tax increase to help the schools, local municipalities and the general fund.  I don’t care if it is one tax increase or two tax increases.  I don’t care how it gets done.  Just get it done.’

Let me tell you…You should care.

Allowing the GOP to raise the sales tax instead of simply raising the fuel tax or the income tax to cover expenses is dangerous.  IMO, it is actually part of the GOP plan to eliminate the income tax altogether and go to a 100% consumption tax (sales tax) revenue system in Michigan.  If you are willing to raise the sales tax for road repairs, then why not raise it again the next time we are desperate for revenue? Why not for schools?  Why not for prisons?

Over the last few of years Gov. Snyder  moved business over to a 6% flat corporate tax and gave huge business tax credits.  The State lost out on a lot of revenue and it wreaked havoc on the state’s budget. 4,5     Chad Livengood of the Detroit news explained the effect on the budget this way 5 :

To alleviate an immediate $325 million deficit blamed on surging business tax refunds, Snyder proposed slashing spending in state agencies by $207.3 million this year and shifting $166 million in community colleges payments to the School Aid Fund. Among the biggest losers were community health, prisons and film incentives.

There is less revenue to go around and thus our schools and roads suffer.  So while they are convincing you to increase the sales tax  to fix the roads because we have a revenue shortfall, they are still cutting income taxes and other business taxes leading to a large general fund deficit. The Governor and GOP led legislature are shifting the tax burden from business on to the individual every time the can. See their 78 point action plan that calls for repeal of the state’s prevailing wage law and income tax cuts.  If Proposal 1 passes there will be another ask in the near future to raise the sales tax again to cover all these tax cuts that are in the plan.

Don’t believe me that this could happen? That they want to eliminate the income tax? Well take a look at this. State Rep. Bob Genetski already attempted to repeal the state income tax and put it on the November 2o14 ballot for voter approval.7   House Bill 4898 was introduced in the house, but referred to the committee on tax policy.  Although, the bill appeared to have died in committee,  this idea is out there and is being actively acted upon.

Gov. Snyder appeared to be against Genetski plan for the reason that “It would be difficult for the state to both cut or eliminate income tax while paying off the debt, Snyder told MLive.  “You have to hope for a major supply-side impact if you are going to cut your tax revenues to pay down debt”

Translation for me is that they need to find away to replace the lost revenue or Snyder won’t back it.. Hhmm…maybe voters, under duress, agreeing to raising sales taxes to cover expenses is the way to replace revenue.  Just saying.

The contradiction in Prop 1

contradictionSupporters of the sales tax proposal claim that this is all about safety, that our roads are dangerous and that we need to approve Proposal 1 to fix the situation.  We see commercials of mothers and their children driving on deteriorated roads and under bridges that have plywood installed to catch falling concrete.  When I hear that something is dangerous and related to safety, I tend to think that the solution should be immediate.  If the solution does not come quickly, then how “dangerous” could the situation have been?  I also tend to think that if something is actually “dangerous” and purposely delayed that the situation falls under negligence and dereliction of duty for an elected official.

Well Proposal 1 does not appear t0 prioritize road repair or the safety of our roads.  It would phase in new road funding while concentrating on paying down infrastructure debt first.  Say what?!?  We have “dangerous” roads, crumbling bridges with falling concrete and our legislatures want to pay down debt before actually fixing the roads?  Huh?  WTF?

Year 1 2015-2016
$865 million will be used to pay down debt.
$368 million will be distributed to state and local road agencies for repairs

Year 2 2016-2017
$468 million will be utilized for debt pay-down.
$764 million will be distributed to road agencies for repairs

Year 2018
all $1.25 billion will be distributed to road agencies for repairs

Now MDOT didn’t ask for a phase in or help with paying down debt.10  So why do our legislatures think that the debt payments should take precedence?  They believe that the money will not be used efficiently, they will not get enough bang for their buck.  Jonathan Oosting at Mlive reported on their reasoning:10 

The ramp up was pushed by House Republicans, who were concerned that putting too much new money into the system right away would drive up demand — and subsequently prices — for road construction and materials.
It’s really allowing the industry to know how big the program is going to be,” said (MDOT Director Kirk) Steudle. “It will give the industry a year or two to gear up, and it’ll provide opportunities for people who want to come into the market as well and provide more competition.”
Steulde said several lawmakers contacted him last year about the prospect of “induced construction inflation.” For instance, he said, if three county road commissions in one region all try to buy hot asphalt from the same local contractor at the same time, prices might rise due to demand.

Really?  Saving money trumps protecting their citizens? If you want me to go along with a plan I hate, a plan that changes our tax structure to a conservative benchmark, a plan you labeled as “dangerous”, you don’t tell me that  the price of asphalt is the more important than concrete falling on my head.

I find this deplorable.  All the safety rhetoric that is being spouted right now to get voters to approve this is nothing but a bait and switch.  This is not about “Safe Roads”, it is about using our deteriorating roads to convince  the voters to shift the tax system to a consumption tax (sales tax) system.  It is sort of a non-sequitur logic where  they relate a non-related issue to the issue under discussion.

In order to have safe roads, we must approve a sales tax increase to help the schools and local municipalities

When in reality we just needed to raise the gas tax to have money to repair the roads.

 

Vote No on Proposal 1

cropped-decisionmaking2.s600x600.jpgI’m voting no on Proposal 1.  The end does not justify the means.  It is blackmail pure and simple.  I should not have to vote for a convoluted tax restructuring plan to feel safe on the roads.  I do not believe that this is the only option and that there is no Plan B.   There are other options, the GOP in Lansing just refuse to consider them. WE need to MAKE the legislators consider them.

If there is one thing everyone in this state agrees upon, whether your an urbanite, rural folk, small towners, suburbanite, is that we need to fix the roads.  And most of us realize that we need to pay for it.  The question is not IF we need to fix the roads but HOW to fund it.  The proposal gives us one option where we chose yes or no.  That does not mean we are not willing to pay for any road repair at all.  That does not mean we are refusing ANY tax increase, we are just refusing THAT tax increase that was proposed.

Some elected officials believe that Prop 1 needs to be supported because there is not another credible/doable plan on the table.  I don’t really care about credible/doable.  I care about logical and what the right thing to do is. Everything has a consequence and if the logical thing cannot even be considered by our current legislature than we need to replace the current legislature. The only way to do that is to have the consequence actually affect the voter.  Rhetoric will never change the electorates mind, but feeling the pain of bad roads will.  It is shortsighted to just think about “now” instead of the future and the precedence it will set.

Voting for something you don’t like or want because of fear or blackmail is not good for the future. We need to just say no to irrational and poorly thought out plans. We should force the Michigan legislature to come up with a new plan even if we have to suffer with bad roads for another year. After all, Prop 1 doesn’t really fix our roads immediately. Remember most of the new fuel tax goes to pay down debt in the first 3 years.  Roads are the perfect situation for this. We get the government we vote for. If people want a decent plan to fix our roads, then we need to vote in decent representation. There are consequences to voting in ultra conservative, no-taxes under any circumstances types. If you want your roads fixed, then vote for a candidate who thinks it’s the responsibility of the government to actually FIX the roads.

We all need to take a lesson from President Obama…the President Obama of today, not from his first year in office.  When President Obama first took office he tried to compromise with the Teapublicans and forge deals with them.   Every time he did, they moved the goalpost and then tried something more extreme the next time.  Now President Obama simply says NO.  Just last month the Teapublicans were refusing to fund the Department of Homeland Security (DHS) unless Obama rescinded his executive order on immigration.  The year before, they refused to fund the government unless Obamacare was dismantled.  Should Obama have given in because funding the government and the DHS are critical?  NO, he didn’t and shouldn’t.

With Proposal 1 we must have our roads repaired.  It is unquestionable.  Why settle for a sub par proposal that does not even give us what we need which are roads repaired immediately.  We say no and insist on a new proposal.  We wait them out or throw them out.

aasealThe Ann Arbor City council will be discussing a resolution in support of Proposal 1 at their Monday, March 16 meeting.  I am not sure how they plan on voting on this except that the resolution endorsing Proposal 1 is submitted by CM Warpehowski and Mayor Taylor.  I am quite shocked that they are even considering this.  Elected Officials might potentially vote yes at the ballot box on the proposal because they feel like they have no choice and feel nervous about the outcome, but it is a completely different thing to SUPPORT it.  SUPPORTING it implies you agree with its contents, that you think it is reputable, that you think it is acceptable.  Proposal 1 is none of those things. Prop 1 uses fear about road conditions to force the electorate to agree to a change in our revenue collecting system in Michigan.  I do not see how any true Democrat could endorse Proposal 1.  City Council is not required to to show their support.  They can simply stay silent on the issue.  Why they are choosing to bring this unpopular and ill conceived plan to council for support is baffling to me.

Some Democratic elected officials may feel that it shows leadership to support such an unpopular plan that they feel  is a solution to a critical problem. But as I pointed out many times, this solution does not fix our problem.  It is ill conceived with ulterior motives written into it. It is not the most logical or the most efficient solution to the problem…simply raising the fuel tax is.  Real Leadership is standing up for the right thing,  not for what what they think may be good enough out of fear of the unknown.

For those who are afraid that if we vote no that the state legislature will do nothing to fix the situation or make drastic cuts somewhere else to fund the road repairs, I say this. They HAVE TO do something.  Just like congress had to fund the government and the Dept of Homeland Security.  I would rather take one step back in order to take 2 steps forward.  If we give up now, why don’t we just concede our government over to the ultra conservatives.

I am voting no and I hope you do too.

Non Sequitur

-MOTL

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1 Jonathan Oosting, Michigan sales tax: Where does the revenue go? And what could an increase mean for road funding?  Mlive.com, February 18, 2013

2 Detroit Free Press Editorial Board, Roads 101: What you need to know about Proposal 1.  Freep.com, February 28,, 2015

3 Paul Egan, Gas tax 101: Why Michiganders pay high gas taxes for crummy roads. Free Press/WZZM13ABC, December 2, 2014.

4 Andrea Goodell, State Rep. Bob Genetski crafts bill that would repeal Michigan income tax.  Holland Sentinel.com, June 28, 2013.

4 Chad Livengood, Michigan business tax credit liability to soar to $9.4B.  Detroit News, February 19, 2015.

5 Chad Livengood and Gary Heinlein, Snyder pitches education boost, health cuts.  Detroit News, February 12, 2015.

6 Jonathan Oosting, Michigan House GOP unveils ‘most bold agenda’ yet calling for prevailing wage repeal, income tax cut.  Mlive.com, February 5, 2015

7 Andrea Goodell, State Rep. Bob Genetski crafts bill that would repeal Michigan income tax.  Holland Sentinel.com, June 28, 2013.

9 Shandra Martinez, Get rid of income tax? Gov. Snyder explains why policy forum economist’s idea isn’t good now.  Mlive.com, September 29, 2014.

10 Jonathan Oosting, Michigan Proposal 1 would pay off debt, ramp up road funding over three years.  Mlive.com, March 12, 2015

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