News Story

How Does Michigan’s Tax System Rank?

Not the best, not the worst across the United States

They say nothing is certain except death and taxes. And how high those taxes are matters to people as well. So how much do Michigan citizens pay in taxes and how does that rank across the United States?

The Tax Foundation’s State Business Tax Climate Index is a comprehensive and source that examines and compares how well each state’s tax system is structured. The rankings are generated through the compilation of the states’ many taxation components including income, property, and other individual and corporate taxes.

Overall tax ranking: 14th

From 2014 to 2020, Michigan steadily declined in the ranking, moving from 11th to 17th on the list, largely because of improvements of the tax systems in other states. This year, the pattern broke. For the 2021 Business Tax Climate Index, Michigan is ranked 14th in the nation. Whether the sudden climb in ranking is a result of Michigan’s own improvement or the shortcomings of other states isn’t entirely clear.

In 2011, Michigan owed 3.1 billion dollars in outstanding unemployment insurance loans to the U.S. treasury. After almost ten years, Michigan finished repaying the loans and eliminated obligation assessment on businesses’ tax rates. The Tax Foundation moved Michigan’s UI tax rank from 49th to 17th after the solvency tax was removed. So, Michigan’s unemployment insurance debt tax may have been the anchor dragging down the overall score for many years.

The Tax Foundation’s studies provide plenty of other interesting data about the mitten’s tax system. They break down the percent Michigan citizens pay across all major areas.

Individual tax rate: 12th

For individual income taxes, the Tax Foundation ranks Michigan as the 12th best in the United States. The Great Lakes State has a 4.25% flat tax on income. It was 3.9% for decades before rising to 4.35% in 2006 and dropping a bit in 2012 where it has stayed put. One factor that has changed, is Michigan’s personal exemption which increased from $4,750 to $4,900 in 2020 as was planned by a 2018 law.

Nine states have no income tax, and of the 41 who have one, only eight have a flat income tax. Out of the eight states with a proportional tax, Michigan has the third lowest marginal rate. Many other states’ progressive tax systems have a higher maximum statutory rate, but Michigan’s proportional tax even holds its ground when compared to the maximum statutory rates for incomes under $50,000 a year. With this filter applied, Michigan ranks as the 8th lowest out of the 41 states with income taxes.

Sales tax: 10th

Overall state and local sales taxes matter as well. In Michigan, the state sales tax has been six percent since 1994. This makes it the 17th highest in the nation. However, Michigan is one of only 13 states that do not impose local sales taxes. So, when comparing states’ combined state tax rates and average local tax rates, Michigan has the 13th lowest sales tax rate.

Michigan’s gasoline tax holds a small role in the overall sales tax ranking, but it’s still a noteworthy mention. At 41.98 cents per gallon, Michigan’s gas tax is the 9th highest in the nation.

Taken together, the Tax Foundation ranked Michigan’s overall sales tax component as the 10th best out of the 50 states.

Property taxes: 35th

Property taxes are another point of interest in the index calculation. Using the property tax component of their tax index, with 1 being the best property tax codes and 50 being the worst, the Tax Foundation ranked Michigan 35th overall. Michigan’s property tax codes do not seem to have become more competitive in recent years. From 2018 to 2020, Michigan held the 36th spot.

The Tax Foundation notes that, unlike taxes on intangible property, real property taxes are generally more transparent and actually work to benefit those who are required to pay the taxes.

One weakness in the Michigan’s tax code is its partial taxation of business inventory. These taxes penalize businesses with larger inventories, such as retailers and manufacturers. The Tax Foundation warns that “immediate elimination of the tax could wreak havoc on local government budgets.”

Lower taxes, more revenue

While the state’s tax system has made improvements, it’s spending continues to grow each year. From 2009 to the pre-pandemic budget in 2019, state revenue increased $9.1 billion. When adjusted for inflation, this is a 16.4 percent increase.

State revenue expands as economic prosperity grows and most experts say that tax policy plays some part in this growth. The Tax Foundation’s research examines not a taxed dollar amount, but rather, the structure of the taxation system itself. In the past years, beneficial reform to the system has increased and so has state revenue. This may mean that the reduction of burdensome taxation has, consequentially, promoted Michigan’s economic growth. This further enforces the Tax Foundation’s emphasis on competitive tax codes role in encouraging economic growth.

As the Mackinac Center for Public Policy’s Director of Fiscal Policy, James Hohman, puts it, “Michigan demonstrated that states can improve their tax structure without bankrupting the state budget. In fact, Michigan spending kept increasing even as it improved its tax competitiveness.”

Overall, Michigan’s tax system shows no outstanding innovations nor detrimental failings, but rather a middle-of-the-road structure that leaves room for uncertainty as the economy exits the blow of the pandemic. For politicians and taxpayers alike, the figures provided by the Tax Foundation in combination with some retrospective looks at state data are useful insight that can be a valuable resource in reforming tax systems to best serve Michiganders in the coming years.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.