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

gas pump
President Joe Biden is calling for the federal government to freeze its tax on gasoline for three months. (Shutterstock)

LANSING — President Joe Biden on Wednesday urged Congress to suspend the federal gas tax and called on states to do the same, something Michigan legislators have urged of Gov. Gretchen Whitmer since prices hit record highs.

The federal tax, 18.4 cents per gallon of gas and 24.4. cents for diesel, should be frozen for three months, Biden told Congress. It would be the first time the United States has implemented a gas-tax holiday, and there are plenty of obstacles.

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“I fully understand the tax holiday alone won’t is not going to fix the problem, but it will provide families some immediate relief, just a little bit of breathing room, as we continue working to bring down prices for the long haul,” Biden said. 

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The price of gas has climbed to record levels for the past few months, and suspending taxes is one of the few tools the government has to lower prices, which averaged $5.13 a gallon in Michigan on Wednesday.

In addition to the federal tax, Michigan adds a 27.2 cents per gallon tax as well as a 6 percent sales tax. Any relief would take time to kick in, warned Daniil Manaenkov, a University of Michigan economist.

“Anything is welcome because families are hurting not just because of oil prices, but it’s the joint hit of high gasoline and food prices, which are also rising quite significantly,” Manaenkov, an who specializes in forecasting, told Bridge Michigan.

In Michigan, Republicans have spent weeks jockeying with Whitmer over proposals to suspend gas and sales taxes, which slice more than 57 cents a gallon off of wholesale fuel prices.

If states were to freeze tax collections, prices per gallon could decrease close to 75 cents, economists said.

“That is very significant,” said Zachary Cohle, an assistant economics professor at Saginaw Valley State University.

Since gas prices began to soar, Maryland, Connecticut, Georgia, Florida and New York have suspended gas taxes. Critics of tax holidays caution the taxes are on wholesale prices and not all the savings are passed on to customers. 

“Any time tax is added, the burden is shared between the consumer and the (gas supplying) firm,” Cohle said. “With gasoline, the consumer shares more of the burden than the firm itself.”

However, budget estimates by the Wharton School of the University of Pennsylvania show that a majority of the cost savings were passed on to consumers in Maryland, Connecticut and Georgia.

In Connecticut, between 71 percent and 87 percent of all gas tax savings went to consumers, while it was 72 percent in Maryland and between 58 percent and 65 percent in Georgia.

Biden’s announcement followed calls from Whitmer and other governors to suspend the federal tax. The first-term Democratic governor cheered the move on Twitter, saying she’s “called for this for months… Michiganders need relief, and they need it now.”

But in March, Whitmer vetoed legislation to suspend Michigan’s gas tax from April through September, in part because it would have deprived funds for road repairs.

Last month, the Senate approved bills that would suspend both the state gas tax and 6 percent sales tax on gasoline from mid-June through mid-September.

The nonpartisan Senate Fiscal Agency estimates the Senate’s plan could cost Michigan up to $800 million in lost tax revenue in the current fiscal year — but most legislators aren’t concerned with the loss because the state has a $6 billion surplus.

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Any shortfall will have to be immediately covered by the Legislature in Michigan, Manaenkov said.

“States have constitutional amendments that prohibit deficit spending,” Manaenkov said. “If we wanted to suspend the gasoline tax, that would have to be part of the budget that would have immediate offsets somewhere else.”

Republicans Sens Tom Barrett, R-Charlotte, Aric Nesbitt, R-Lawton, Dan Lauwers, R-Brockway Township, and Roger Victory, R-Hudsonville, who are sponsoring bills aimed at suspending Michigan’s gas tax did not return Bridge’s requests for comment.

Cohle said he’s optimistic that gas prices will fall naturally “a lot of people can’t wait for that to actually occur and would welcome a gas tax holiday.”

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