In a nutshell:
- Publication of the 37th edition of CRC’s Tax Outline provides an opportunity to reflect on some changes and some constants in our state and local tax structure over the years.
- This year, we added three new wagering-related taxes to our accessible tax reference resource: sports betting, Internet gaming, and fantasy contests. This brings to 64 taxes, the total number of authorized state/local taxes.
- With these additions, the state now authorizes (and taxes) six different forms of wagering; it only taxed horse race wagering when we issued our first edition of the popular Tax Outline in 1963.
With next week’s delayed-Tax Day (May 17) publication of our 37th edition of the Outline of the Michigan Tax System, we are taking a trip down memory lane – the state and local tax edition. We are going back to our inaugural edition of this popular report, released in July 1963, to highlight some of the ways Michigan’s state and local tax structure has evolved over the past six decades.
While examining these two documents (1963 and 2021), we were not too surprised to find how the state’s tax system, at least many of its individual components, had changed over the period. For example, we knew that the state income tax was not adopted until 1967 and that the state has had an on-again-off-again relationship with the corporate income tax. But, even more interesting than observing these developments chronicled in our Tax Outline, we were surprised to find how many state and local taxes have NOT changed since the early 1960s.
Let the games begin! And the taxes too!
Our 2021 update brings the total number of wagering-related taxes authorized in state law to six; five available to and levied by the state government and one levied by the City of Detroit. In 1963, Michigan law only allowed (and taxed) one form of wagering – horse racing. A tax that goes back to 1933. The state was not even operating the lottery in 1963 – lottery wagering was not authorized until a 1972 voter-approved amendment to the state constitution.
Today, in addition to being able to bet on a horse race and play the lottery, Michiganders (and visitors) have a complete menu of sports and other betting options available to them thanks to laws passed in 2019. With Public Act 149 of 2019, Michigan joins 22 states with legalized sports betting – limited to state-licensed casinos (three in Detroit) and sovereign tribal casinos (12 casinos across the state). Casinos began accepting in-person sports wagers on March 11, 2020, with $1.5 million in tax revenue generated in 2020 via the new 8.4 percent tax on gross sports bets. New Internet sports wagering became legal in January 2021 and subject to the same tax regime.
Additionally, Michigan law authorized two other gambling options in 2019; Internet gaming (e.g., online poker, blackjack, slots) and fantasy contest wagering. Internet gaming began in the three Detroit casinos as well as many tribal casinos across the state in early 2021, introduced to customers along with the Internet sports wagering option.
The growth of legal wagering options (and the associated taxes) over time in Michigan also has grown state and local coffers. Consider the fact that the tax haul from horse wagering (the only legal betting activity subject to tax) was $8.1 million in 1963 ($70 million in today’s dollars). By contrast, the combination of existing wagering tax revenue (i.e., horse race, state and local casino) plus these three new taxes (i.e., sports, Internet gaming, fantasy games) is expected to generate close to $370 million annually when betting markets are fully mature. This is five times larger (inflation-adjusted) than the amount of wagering-related taxes collected 60 years ago in Michigan.
And, this is on top of the nearly $1.2 billion in net lottery proceeds retained by the state. State law directs net wagering proceeds, after administrative expenses, to public education. Adding in these dollars – Michigan state and local wagering taxes, including the lottery money, total over $1.5 billion per year or nearly $150 per resident.
The more things change, the more they stay the same
This is certainly the case for the beer tax.
If the story behind wagering taxes is one of change and growth, at least in the recent history of the state’s tax system, we don’t have to look too far in our Tax Outline publication to see a different scenario. The beer tax, first authorized in 1933, was one of 41 taxes covered in our 1963 edition of the Tax Outline and is one of the 64 taxes in the current publication. We have not had to make a major update to this tax entry in over 60 years.
Most notably, the beer tax rate, set at two cents per 12-ounce bottle of beer in 1963, has not changed over the span of 12 presidential administrations. And, while consumers have seen the price of their beloved thirst-quencher rise from $1.73 per six pack in 1963 to $8.61 per six pack today, the government’s take (e.g., tax paid as percent of price) has actually shrunk. At 12 cents per six pack in 1963, the state tax amounted to nearly 7 percent of the total price paid. Levied at the same rate today, the state tax collected on a six pack of beer accounts for less than 1.4 percent of the total price.
With a fixed rate, consumption has been the primary growth driver of beer tax receipts over time. Generally, Americans’ alcohol consumption is up slightly since the early 1960s. This increase, however, has not been sufficient to maintain the purchasing power of Michigan’s beer tax yield. We can see that clearly in the numbers reported.
The total beer tax yield in 1963 was just over $35 million, about $300 million in today’s dollars. In 2020, with consumption up a bit, the state brought in a little more than $37 million in beer tax. So, while up only slightly in nominal terms, inflation-adjusted collections from the beer tax are way down. In order for the beer tax yield to generate the same purchasing power it did in 1963, today’s tax rate would have to be increased from $0.02 per bottle to $0.16 per bottle. Michigan’s current $2.00 per pack cigarette tax equates to a per-cigarette tax of $0.10, five times more than a bottle of your favorite hazy IPA.
The Research Council has committed to researching, documenting, and analyzing the varied and complex evolution of Michigan’s state and local tax system for nearly six decades. Over this time and through the pages of the Tax Outline, we have witnessed major shifts in tax policy (e.g., adoption of new taxes, changes in tax rates, additional exemptions), but our report also reveals some unusual constants (e.g., beer tax rate). Throughout its history, our goal in preparing this report has been to keep Michiganders informed about the taxes they pay and to promote accountability for the use of these dollars.