Outline of the Michigan Tax System
This outline is designed to be a ready reference to the 64 taxes authorized for the state and local government in Michigan. It contains information on each of the 38 state and 23 local taxes effective as of the publication date, including:
— A description of each of the 61 state and local taxes currently levied and historical collections from major taxes.
— A summary of major tax law enacted by the state legislature between January 1, 2018 and April 1, 2019.
— A table of tax collections for fiscal years 2014-2017.
A tax is an enforced financial charge exacted by a government for the support of its various functions. State and local governments in Michigan levy several types of taxes. This report categorizes Michigan taxes as follows:
- Income taxes are levied based on income earnings. The state and local personal income taxes are based on federal adjusted gross income. Non-resident local income taxes are based on earnings from within the taxing cities. In 2011, the state enacted a 6 percent Corporate Income Tax levied only on C corporations. Only the state and city governments are authorized to levy income taxes in Michigan.
- Business privilege taxes are levied on firms that do business in Michigan or, in some cases, engage in a specific line of business. With the Single Business Tax, in effect from 1975 to 2007, and the Michigan Business Tax, in effect from 2007 to 2011, Michigan businesses were subject to a value-added tax with the SBT and to a hybrid of two individual taxes; a business income tax and a modified gross receipts tax. The Michigan Business Tax was eliminated effective January 1, 2012 for most business firms, and replaced with the Corporate Income Tax. State government is authorized to levy eleven types of business privilege taxes in Michigan. Counties in Michigan are authorized to levy one type of business privilege tax (9-1-1 charge) and the only municipal government authorized to levy this type of tax is the City of Detroit, which can levy a casino gaming tax on the three Detroit casinos (a complement to the state-level tax levied on the casinos).
- Sales-related taxes are levied in several forms in Michigan. The Sales and Use taxes are levied on the retail sale or use of tangible personal property. Until recently, only the state government was authorized to levy sales and use taxes in Michigan. At the August 2014 election, voters authorized a statewide special authority to levy a “local” use tax. (See boxes on pages 25 and 29). Excise or selective sales taxes are levied, like sales and use taxes, on the purchase of individual products and services. In addition to the excise taxes included under the sales-related taxes, motor fuel taxes are listed separately under transportation taxes because they are, in large measure, user charges. State government is authorized to levy nine types of sales-related taxes in Michigan. Counties are authorized to levy three types of sales-related taxes, and the City of Detroit is also authorized to levy a sales-related tax.
- Property taxes are levied based on the value of property. In addition to the taxation of real and personal property that typically falls under the local General Property Tax, local governments are authorized to levy three other ad valorem taxes (unit-wide special assessments, Low Grade Iron Ore Tax, and the County Real Estate Transfer Tax) and the state government is authorized to levy five ad valorem taxes (State Education Tax, Utility Property Tax, State Real Estate Transfer Tax, State Essential Services Assessment Tax, and Motor Vehicle Registration Tax). Motor vehicle registration taxes are not typically associated with property taxes; however, because Michigan taxes personal passenger vehicles based on their value, the Motor Vehicle Registration Tax qualifies as a property tax. Michigan local governments are authorized to levy eleven different types of specific taxes in lieu of ad valorem property taxes, several of which were created as economic development tools to reduce the tax burden on individual taxpayers.
- Transportation taxes are sales-related and property taxes levied on items used for transportation purposes. Each of these taxes is earmarked specifically to transportation purposes (i.e., operating and capital expenditures). For ease of use, they are grouped as transportation taxes in this outline as opposed to another type of tax.
When is a charge considered a tax?
This question is significant in Michigan with the limitations placed on taxation in the State Constitution. Specifically, amendments to the State Constitution adopted in 1978 (commonly referred to as the “Headlee Amendment”) directly affect the level of state taxes and means of collecting local taxes. As part of a national taxpayer revolt, the Headlee Amendment was adopted by the voters of Michigan to limit legislative expansion of requirements placed on local government, to control increases in government spending, and to limit taxes both at the local and state level.
State v. Local Taxes
One ramification of the Headlee Amendment is the differentiation of state and local taxes. Section 26, of Article IX, of the 1963 Constitution placed a limit on the growth of total state revenues.
There is hereby established a limit on the total amount of taxes which may be imposed by the legislature in any fiscal year on the taxpayers of this state. . . . The legislature shall not impose taxes of any kind which, together with all other revenues of the state, federal aid excluded, exceed the revenue limit established in this section. . .
For the purposes of this document, in addition to the categorization by tax type, this Outline has divided taxes according to which level of government actually levies the tax, recognizing that all taxing authority ultimately comes from the state. If the levy of a tax requires local action, it is considered a local tax. All other taxes are considered state taxes. State taxes are most directly affected by this limitation. Specifically, the question of which taxes are state-levied is significant in calculating the ratio later spelled out in this section. While local taxes are not affected by this limitation directly, the drafters of the Headlee Amendment considered the possibility that one means of evading this restriction would be to pass functions to local government. Section 25 of Article IX, provided for such a possibility by providing that
. . . The state is prohibited from requiring any new or expanded activities by local governments without full state financing, from reducing the proportion of state spending in the form of aid to local governments, or from shifting the tax burden to local government. . .
Some taxes are very clearly state taxes. These taxes are levied on a statewide basis, uniform across all taxpayers, and the revenues from these taxes are deposited into state funds to finance state government activities. For other taxes the distinction is not so clear. Some taxes are state taxes levied for local purposes. The Airport Parking Excise Tax for instance, is levied only on the parking facilities in and around the Detroit Metropolitan Wayne County Airport and the majority of the revenues are used to support primarily local functions, such as general assistance to the City of Romulus and indigent health care in Wayne County. Even though the majority of the revenues are used for seemingly local purposes, this tax is considered a state tax.
Other taxes are state taxes collected by local government. Cities and townships are responsible for collecting property taxes for all units that geographically overlap their boundaries, including: counties, local school districts, intermediate school districts, and special authorities. With enactment of the State Education Tax as part of Proposal A of 1994, cities and townships became responsible for collection of that tax as well. Although taxpayers pay this tax to local units of government, it is levied uniformly across the state, revenues are transferred to a state account, and it is dedicated to the state School Aid Fund, making it a state tax.
Taxes v. Fees
Because of the number and variety of local units of government, it is not practical to place an overall limit on the total revenue of local government in a state. Instead, the Headlee Amendment attempted to limit local tax revenues in two different ways. First, it attempted to control the property tax burden, the primary means of funding local government in Michigan, by limiting net growth in the tax yield on a unit-wide basis. Second, and more significant, it required voter approval for the levy of new local taxes or increasing the rate of existing local taxes. Section 31 of Article IX provides
Units of Local Government are hereby prohibited from levying any tax not authorized by law or charter when this section is ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when this section is ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon. . .
This provision has come under some scrutiny over the question of taxes versus fees. In a 1998 state Supreme Court decision, Bolt v City of Lansing, the court laid out three criteria to distinguish a fee from a tax:
- User fees must serve a regulatory purpose rather than a revenue-raising purpose;
- User fees must be proportionate to the necessary costs of the service or commodity, and imposed on those benefiting from the right/service/improvement supported by the fee; and
- User fees are voluntary in nature.
Contrasted with fees are taxes levied by government. By implication, a tax:
- Is to be levied to raise revenue for the general operation of government;
- Is to be levied to benefit the general public; and
- Is compulsory in nature.
A fee may be thought of as a charge that permits an individual or other entity access to a government service or to a privilege granted by government, whereas a tax simply underwrites the provision of governmental services available to anyone, whether the tax has been paid or not. For example, a toll on a bridge or highway permits a specific individual access to the bridge or highway and is, therefore, a fee. On the other hand, a gasoline tax, which also pays for bridges and highways, confers no special privilege and is, therefore, a tax.