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As gas prices soar, Michigan tax-holiday plans prompt squabbling, gridlock

pump gas
Michigan drivers pay 27 cents per gallon in gasoline taxes in addition to the state’s 6 percent sales tax. (Shutterstock)

June 22: Michigan gas prices could drop 75 cents per gallon if state, feds freeze taxes

LANSING — Pausing Michigan’s gas tax and the sales tax on gasoline purchases could slice more than 50 cents a gallon off of wholesale fuel prices and is one of the few tools state officials have to ease the burden of high prices at the pump.

A majority of lawmakers have backed some type of tax freeze on gas purchases for months, arguing the state’s $6 billion budget surplus is enough to cover any hit to the state budget.

But for months, lawmakers and Gov. Gretchen Whitmer have been unable to enact a gas tax holiday, even as prices skyrocket to $5.22 per gallon as of Tuesday and states from Maryland and Connecticut to Georgia, Florida and New York have suspended their taxes.

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“In every state where we’ve seen a tax holiday, (savings have) been passed along in a matter of days,” said Patrick De Haan, head of petroleum analysis at the gas price comparison site GasBuddy, who cautioned that the tax is applied to wholesale prices and drivers may not enjoy the full break. 

So far, Gov. Gretchen Whitmer has been the biggest barrier to a gas tax holiday in Michigan, although she’s expressed support for suspending the state sales tax on gas purchases.

In March, she vetoed legislation to suspend the state’s 27.2-cents per gallon tax from April through September, in part because it would have deprived funds for road repairs.

In addition to the gas tax, Michigan also charges a 6 percent sales tax on gas, while the federal government adds on an 18.4-cent-per-gallon tax.

Last month, the Senate approved more legislation to suspend both the state gas tax and 6 percent sales tax on gasoline from mid-June through mid-September.  Senate Bills 972, 973, 974 and 1029 are now pending in the House, and lawmakers are in active negotiations with Whitmer’s office this week, House GOP spokesperson Gideon D’Assandro said.

Assuming a $5-per-gallon gas price, the overall savings on wholesale fuel prices would be about 57 cents per gallon. 

In theory at least, that could result in about $27 savings per driver for those who travel 1,200 miles a month in vehicles that get 25 miles per gallon.

Experts say it’s unlikely that drivers would realize that large of savings, because the tax is on wholesale prices that may not get passed on to customers. In Maryland, the cost per gallon decreased about 10 percent within days of the state’s suspension of taxes, but De Haan said Michigan drivers shouldn’t expect to see 20-cent-per gallon decreases immediately.

An estimate from the nonpartisan Senate Fiscal Agency estimates the Senate plan could cost Michigan up to $800 million in lost tax revenue in the current fiscal year — although updated revenue projections show the state continues to benefit from a large budget surplus. 

The tax relief would help drivers like Markee Hudson, 35, of Detroit, who recently got a higher-paying job but feels like he’s “back to square one” every time he fills up his car’s gas tank. Even if it only results in a slight decrease, Hudson believes pausing state taxes collected on gas would be worth it. 

“Of course, it’s not going to help the people that don’t have a car and have those opportunities, but for those of us that do have those cars and those opportunities, it’s going to, 100 percent,” he said.

But some residents are worried the costs to the state wouldn’t be worth the possible modest — and temporary — gains. 

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Justin Allen, who works for Hager Fox Heating and Air Conditioning in Lansing, said the high gas prices have forced his company to pass the cost down to their consumers.

Allen drives nine hours a day for his job, noting, “we take a hit, we have to pass it down.” He said he does not believe putting a pause on the gas tax would truly alleviate the prices at the pump.

“It’s going to be high no matter what,” he continued. 

Sky-high prices prompt gas tax review

Michigan’s prices have trended higher in part because gasoline supply in the Midwest is at an all-time low for the season, while demand continues to to be high, De Haan said. 

“A lot of this is simply related to high demand and refiners not really able to keep up with it thus far,” he said. “And as a result, we’ve also seen gas prices continuing to go up.” 

Republican lawmakers in Michigan were early supporters of the plan to adopt a gas tax suspension in Michigan, arguing a fuel tax pause would guarantee additional savings since it wouldn’t be contingent on the sticker price of gasoline. 

“We are fighting to lower taxes so residents can better afford record-high inflation and gas prices,” Sen. Aric Nesbitt, R-Lawton, said at the time of the Senate’s vote on the new plan last month.

The bills as written stipulate $300 million would go to local governments and road commissions to offset lost revenue. 

It’s unclear if Whitmer is on board. In a statement, Whitmer spokesperson Bobby Leddy said the governor is “encouraged” by the latest Senate vote and will continue to work with the Legislature on a “broader bipartisan agreement that puts Michigan first by cutting taxes and providing real relief right now for our seniors and working families.” 

If Michigan pursues a tax suspension policy, it’s “not a sure bet” that all of that savings would get passed through to consumers at the pump, as the tax is assessed on wholesale gas suppliers who stock retail stores, said Bob Schneider, senior research associate at the nonpartisan Citizens Research Council of Michigan. 

But in the short term, there’s little else state officials can do if they are trying to quickly lower gas prices for consumers, Schneider said. 

Even possible U.S. policies that could move the needle, such as allowing additional domestic oil production, would take years to affect prices in a meaningful way, he continued.

“I don’t think there’s anything else that I can think of that would drive gas prices and fuel prices down in the short term other than those tax policy changes,” he said. “They’re talking about the things that they can do quick and easy and have as immediate an impact as possible.” 

Whether a tax holiday substantially decreases prices or holds off significantly higher prices, De Haan noted that any respite would cease once the usual taxes are reinstated. 

Other possibilities 

Michigan is one of only seven states where motor fuels are subject to some or all of the statewide general sales tax, according to the National Conference of State Legislatures, and lawmakers’ latest plan includes a temporary suspension of the sales tax collection on gasoline to additionally drive down costs.

The debate over whether to exempt motor fuel purchases from the sales tax existed long before the current increase in gas prices, as the sales tax increases costs at the pump without directing funding towards transportation, like the gas tax does.

But without replacement funding, suspending the sales tax on fuel would impact the School Aid Fund that supports traditional public and charter schools across Michigan. Nearly $3 out of every $4 in sales tax goes to schools.

Senate Minority Leader Jim Ananich, D-Flint, was an early backer of suspending the sales tax for the time being to keep gas prices down. On the Senate floor, he said with high inflation and tight budgets statewide, “the state has a responsibility to step in and help.” 

Currently, the legislation before the state House doesn’t include funding to backfill funding that would typically go towards schools. 

School groups aren’t opposed to a sales tax pause in principle, but taking the funding away even temporarily would mean another hit to an education system still reeling from the COVID-19 pandemic, said Bob McCann, executive director of the K-12 Alliance of Michigan. 

“We certainly understand the pain at the pump right now, and frankly, our schools are paying it, too, with running our bus lines and other equipment,” he said. “So we get it — we are happy to be part of that conversation. But if the conversation doesn't include some kind of offset for that loss of funding, then we're going to have a problem.”

Members of Congress have also floated the possibility of suspending the federal tax, a concept Whitmer has supported. 

Early estimates indicate a federal gas tax holiday would result in modest savings. A March analysis from the Penn Wharton Budget Model estimated suspending the federal gas tax from March to December 2022 would lower average gasoline spending per capita between $16 and $47 while lowering federal tax revenue by about $20 billion over that period. 

‘I don’t see nobody doing anything’

The discussion on addressing high gas prices comes amid an ongoing debate between the Whitmer administration and the Republican-majority Legislature about how best to distribute the multibillion dollar budget surplus.

With no immediate end in sight to high prices at the pump, Michigan drivers have mixed reviews about what short-term relief the state could provide, or whether they should.  

Hudson said he doesn’t blame any particular party or policy for high gas prices, but he believes it ultimately needs a long term resolution. Making public transit more accessible could leave more Michigan residents less reliant on their personal vehicles — and therefore less beholden to gas prices — could go a long way, he said. 

“New York City, Chicago…I would love to live there right now. I would love to live in one of those big cities where I can just hop on the subway system to get to work with gas prices being so high,” Hudson said. 

Some Michigan drivers hope a potential pause doesn’t come at the expense of road repairs. 

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Chad Barckholtz, 46, said his family owns an RV that they typically use for summer vacations, but the high gas prices have put a damper on those plans. But he doesn’t see pausing the state’s gas tax as a resolution.

“We have to keep the gas tax on in Michigan to maintain our failing roads,” Barckholtz said. “Without that gas tax money, we can’t keep our construction moving.”

Ollie Peavy, a Ypsilanti resident filling up his tank at a local Sunoco on Monday, called the current prices “ridiculous” and said he’s never seen gas prices this high in the 60 years he’s been driving. He’s not confident much will change. 

“I don’t see nobody doing anything,” she said. “All they do is raise the prices of not only gas, but everything else.” 

Reporter Karly Graham contributed.

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