- The 2019 update to the Outline of the Michigan Tax System was released today.
- 2018 was a busy year for the tax system; but many of the changes were initiated external to the legislature.
- We’ve hit the 2018 highlights below, but for more in depth information check the outline here.
On Monday, Tax Day, we released the 2019 update to our popular Outline of the Michigan Tax System. This handy reference document provides a description of all 64 taxes authorized to the state and local governments, and reports on recent revenues collected from each. We’ve tracked the evolution of the state tax system through this report since 1963, including the addition of new taxes (we documented 41 total taxes in the inaugural edition) and major reforms to existing ones (Proposal A of 1994 or the several business tax overhauls, like the implementation of the Corporate Income Tax in 2011).
A number of noteworthy changes occurred in 2018 — but the biggest were brought on by forces external to the legislature. Federal tax changes, a key U.S. Supreme Court decision, and an approved ballot initiative each resulted in significant updates to Michigan’s tax system.
Federal Tax Changes
Michigan started 2018 with a bang. In late 2017, the Tax Cuts and Jobs Act (TCJA) was enacted making several changes to the corporate and individual income taxes. The provision to zero out the personal exemption for federal income tax purposes, effectively eliminating it, was one key aspect of the TCJA that particularly affected Michigan taxpayers.
Like many states, Michigan based its personal exemption on the federal exemption. As a result of the federal elimination, the state personal exemption disappeared. This would have resulted in a $1.4 billion tax increase for Michiganders. Governor Snyder and the legislature quickly came to an agreement to restore the state exemption and provide for a series of future increases.
State Funding for Medicaid Matching
Michigan once again changed how it generates revenue to meet the federal matching dollars for its Medicaid program. After having multiple tax structures disallowed by the federal government, the state created the Health Insurance Claims Assessment (HICA) in 2011 to raise the necessary funds. HICA taxed insurance providers based on paid health care claims.
With HICA due to sunset in 2020, the Legislature used the opportunity to redesign the tax. The result is the Insurance Providers Assessment. Instead of focusing on the claims paid out under the HICA arrangement, the new tax assesses a tiered tax on the total number of subscribers to each health insurance provider each month. The changes required federal approval and took effect in October.
Wayfair and the Sales Tax
If you frequently shop online, you might have noticed you’re paying the sales tax at more online shops. That change came from a June U.S. Supreme Court decision. Historically, out-of-state retailers needed to have a physical presence in a state before that state could require the seller to collect and remit sales taxes. In an attempt to change court precedent, South Dakota passed a law mandating sellers with in-state sales exceeding $100,000 or 200 total transactions collect the sales tax. Predictably, a challenge to the case reached the U.S. Supreme Court. Ultimately, the Court sided with South Dakota, opening the path for other states to follow suit.
Michigan, like many states, was quick to react to the court’s decision. The Department of Treasury issued an administrative bulletin quickly after the ruling that altered existing collection procedures for the sales tax. Beginning October 1, 2018, the Department of Treasury required out-of-state retailers with an “economic presence” (the standard used by South Dakota) in Michigan to remit state sales taxes on sales delivered to Michigan.
At the November 2018 general election, voters approved a measure to legalize recreational marijuana for use by adults. The initiative set up a regulatory framework, including a new 10 percent excise tax on marijuana sales. The new regulatory scheme triggered a sunset clause to the state’s existing 3 percent medical marihuana tax, which terminated the medical marihuana tax if a recreational marijuana scheme was adopted. Thus, as of early March 2019, medical marihuana sales are no longer subject to the 3 percent tax and will not be subject to the new excise tax when the recreational marijuana regulatory framework is up and running sometime by 2020.
A Look Ahead
While 2018 ended up being a busy year, 2019 is likely to follow suit. The state’s new chief executive, Governor Whitmer, made several campaign promises which could alter the tax system. The governor’s 2020 Executive Budget is premised on a number of significant tax changes, including a 45 cent fuel tax increase to fix Michigan’s crumbling roads, a repeal of the so-called “pension tax”, an increase to the Earned Income Tax Credit, and a restructuring of how pass through entities (like LLCs and S-Corporations) are taxed. With this being the governor’s first chance to deliver on those campaign promises, 2019 could bring major changes to Michigan’s tax code.