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April 22, 2021

The Death of the Death Tax is not a Sign of Tax Reform

  • A legislative bill is being acted on to eliminate Michigan’s estate tax.
  • Because of the tax’s ties to the federal tax code and federal law changes that phased out the allowable state death tax credit, Michigan has not collected any revenue from this tax since 2004.
  • The Michigan tax code is in need of reform in many places. Elimination of the estate tax accomplishes very little.

The state tax system should evolve to align with the state’s economy. Some might hold up Michigan House Bill 4237 that would repeal the state estate tax as evidence that this is happening in 2021. Elimination of this tax is made possible by the fact that it has not been collected since 2004. It is not a sign of tax reform.

In the early days of statehood, the tax system was based on the value of property. Property taxes were the primary source of revenue. In 1899, enactment of the inheritance tax introduced a new tax based on the value of property for which the ownership was transferred because of a person’s death. In 1939, the state began taxing intangible property such as interest, dividends, and other personal property. 

The state’s largest revenue sources were enacted as the state responded to fiscal pressures and changing economic circumstances. It was not until the Great Depression that the state began taxing sales in the 1930s. Income taxes were not enacted until the 1960s.

Today, Michigan levies 39 taxes and authorizes local governments to levy 23 more taxes.

Before 1993, the inheritance tax was levied on property with a market value of $100 or more transferred by will, intestate law, or in contemplation of death. The surviving spouse and other direct heirs were completely or partially exempted, transfers of certain farm property were exempt from the tax, and transfers to certain foundations or to persons or corporations exempt from property tax were subject to the inheritance tax. The state collected almost $186 million from this tax in 1992, the most ever collected, but this amount represented just 1.5 percent of all state tax revenue that year.

In 1993, the inheritance tax became the estate tax as Michigan’s tax code was altered to piggyback on the federal estate tax and avoid double taxation. It was equal to the maximum allowable federal state death tax credit.  

This relationship remains in effect, but federal tax law changes made the state tax a statutory relic. In 2001, federal tax reforms phased out the allowable state death tax credit over a four-year period beginning in 2002.  As a result, there was no state death tax credit for dates of death after December 31, 2004.  

The credit was set to be reinstated in 2013, but the elimination was made permanent by the federal American Taxpayer Relief Act of 2012.  

The State of Michigan has taken no action to offset the federal change and therefore the state Estate Tax is no longer effective.  State Estate Tax will not be collected in the future unless the federal death tax credit is resumed or the state decouples its estate tax rate from the federal credit.

The potential enactment of House Bill 4237 would seem on its face to be the elimination of a tax. In fact, the tax has not been collected for 16 years, rendering HB 4237 to be more of an exercise in statutory clean-up than tax reform. 

The Michigan tax code certainly has plenty of room for reform if state policymakers care to take on the task of better aligning the tax code with the nature of the state economy. While the economy is evolving to include more service provision, the state sales and use taxes are heavily geared toward the taxation of tangible goods. Many other states have altered their sales and use taxes to tax services. The state gets nearly half of the funding for roads and bridges from motor fuel taxes, while vehicles still using the internal combustion engine are becoming increasingly more fuel-efficient and electric vehicles will be a growing part of the fleet of vehicles on the road. Michigan needs to craft a new strategy for funding road infrastructure. These are the reform measures easiest to tick off. There are many more policymakers could dig into.

And, none of this even begins to address the issues with local government finances in Michigan. 

The death of the death tax will have no fiscal effect on the state. It constitutes statutory clean-up. If policymakers want to undertake tax reform, Michigan is a target-rich environment.

President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

The Death of the Death Tax is not a Sign of Tax Reform

  • A legislative bill is being acted on to eliminate Michigan’s estate tax.
  • Because of the tax’s ties to the federal tax code and federal law changes that phased out the allowable state death tax credit, Michigan has not collected any revenue from this tax since 2004.
  • The Michigan tax code is in need of reform in many places. Elimination of the estate tax accomplishes very little.

The state tax system should evolve to align with the state’s economy. Some might hold up Michigan House Bill 4237 that would repeal the state estate tax as evidence that this is happening in 2021. Elimination of this tax is made possible by the fact that it has not been collected since 2004. It is not a sign of tax reform.

In the early days of statehood, the tax system was based on the value of property. Property taxes were the primary source of revenue. In 1899, enactment of the inheritance tax introduced a new tax based on the value of property for which the ownership was transferred because of a person’s death. In 1939, the state began taxing intangible property such as interest, dividends, and other personal property. 

The state’s largest revenue sources were enacted as the state responded to fiscal pressures and changing economic circumstances. It was not until the Great Depression that the state began taxing sales in the 1930s. Income taxes were not enacted until the 1960s.

Today, Michigan levies 39 taxes and authorizes local governments to levy 23 more taxes.

Before 1993, the inheritance tax was levied on property with a market value of $100 or more transferred by will, intestate law, or in contemplation of death. The surviving spouse and other direct heirs were completely or partially exempted, transfers of certain farm property were exempt from the tax, and transfers to certain foundations or to persons or corporations exempt from property tax were subject to the inheritance tax. The state collected almost $186 million from this tax in 1992, the most ever collected, but this amount represented just 1.5 percent of all state tax revenue that year.

In 1993, the inheritance tax became the estate tax as Michigan’s tax code was altered to piggyback on the federal estate tax and avoid double taxation. It was equal to the maximum allowable federal state death tax credit.  

This relationship remains in effect, but federal tax law changes made the state tax a statutory relic. In 2001, federal tax reforms phased out the allowable state death tax credit over a four-year period beginning in 2002.  As a result, there was no state death tax credit for dates of death after December 31, 2004.  

The credit was set to be reinstated in 2013, but the elimination was made permanent by the federal American Taxpayer Relief Act of 2012.  

The State of Michigan has taken no action to offset the federal change and therefore the state Estate Tax is no longer effective.  State Estate Tax will not be collected in the future unless the federal death tax credit is resumed or the state decouples its estate tax rate from the federal credit.

The potential enactment of House Bill 4237 would seem on its face to be the elimination of a tax. In fact, the tax has not been collected for 16 years, rendering HB 4237 to be more of an exercise in statutory clean-up than tax reform. 

The Michigan tax code certainly has plenty of room for reform if state policymakers care to take on the task of better aligning the tax code with the nature of the state economy. While the economy is evolving to include more service provision, the state sales and use taxes are heavily geared toward the taxation of tangible goods. Many other states have altered their sales and use taxes to tax services. The state gets nearly half of the funding for roads and bridges from motor fuel taxes, while vehicles still using the internal combustion engine are becoming increasingly more fuel-efficient and electric vehicles will be a growing part of the fleet of vehicles on the road. Michigan needs to craft a new strategy for funding road infrastructure. These are the reform measures easiest to tick off. There are many more policymakers could dig into.

And, none of this even begins to address the issues with local government finances in Michigan. 

The death of the death tax will have no fiscal effect on the state. It constitutes statutory clean-up. If policymakers want to undertake tax reform, Michigan is a target-rich environment.

Stay informed of new research published and other Citizens Research Council news.

Select list(s) to subscribe to


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact
President

About The Author

Eric Lupher

President

Eric has been President of the Citizens Research Council since September of 2014. He has been with the Citizens Research Council since 1987, the first two years as a Lent Upson-Loren Miller Fellow, and since then as a Research Associate and, later, as Director of Local Affairs. Eric has researched such issues as state taxes, state revenue sharing, highway funding, unemployment insurance, economic development incentives, and stadium funding. His recent work focused on local government matters, including intergovernmental cooperation, governance issues, and municipal finance. Eric is a past president of the Governmental Research Association and also served as vice-chairman of the Governmental Accounting Standards Advisory Council (GASAC), an advisory body for the Governmental Accounting Standards Board (GASB), representing the user community on behalf of the Governmental Research Association.

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