SALES & EXCISE TAX

73% OF MICHIGAN’S SALES TAX REVENUE SUPPORTS SCHOOL AID FUND

Updated April 2026 | Nicholas Hess, Fiscal Policy Analyst

- Michigan’s reliance on regressive sales and excise taxes deepens racial and economic inequity because they are based on consumption rather than ability to pay.
- The vast majority (73%) of sales tax revenue supports the School Aid Fund (SAF).
- Of the 45 states that levy a sales tax, Michigan is one of only nine that prohibits a local sales tax.

1. Michigan should increase revenue while maintaining equity by broadening the sales tax to include certain services, offset by a small income tax credit for households with low incomes.
2. Michigan should increase revenue by taxing digital goods and services, including digital music and magazines, e-books, online newspapers, and digital TV and movies.

Michigan has levied a sales tax and its complement, the use tax, on the sale of goods since the 1930s. Prior to 1994, the rate was set at 4%. Under Proposal A of 1994, voters approved an additional 2% sales tax on most goods, exempting certain residential goods such as electricity, natural gas and home heating. The vast majority (60%) of the original 4% rate is allocated to the SAF, and the entirety of the added 2% rate is also earmarked for the SAF.^[1] In addition, local governments are constitutionally guaranteed 15% of the initial 4% rate the state collects through a process known as revenue sharing.^[2]

While local sales taxes are broadly not permitted by the state constitution, specific local taxes — such as on accommodations, tourism marketing and city utilities — are permitted in certain municipalities.

Although sales and use taxes make up a significant share of state revenue, Michigan is one of only a handful of states that does not broadly levy a tax on an important category of consumer spending: services. Some examples of services that are taxed in other states include lawn care, animal grooming, professional services and admission to amusement parks. While Michigan’s sales taxes are generally considered highly regressive (meaning households with low incomes pay a higher share of their earnings on these taxes than households with high incomes), targeted income tax credits or rebates can mitigate the impacts of taxing services for families with low incomes. Alternatively, the broadened base could be accompanied by a rate reduction, which could make the sales tax fairer but would have no effect on state revenues.

In addition to sales taxes, a number of products face excise taxes. In Michigan, this includes transportation-related goods like gasoline and diesel fuel as well as a number of “sin taxes,” including tobacco, marijuana products, liquor, wine, beer, and mixed spirits. Excise taxes are inefficient in two ways: they are highly regressive and they fail to provide a steady revenue for state governments.

Cigarette use, for example, is higher amongst adults with low incomes, resulting in these households paying a greater share of these taxes. Meanwhile, the revenue earned from the tax on tobacco products falls year over year because the tax does not rise with inflation — the current tax of $2 per pack has not risen since 2004. As a result, the tax is both inequitable and insufficient to maintain state revenue needs. Apart from raising revenue, these taxes targeted at certain vices, like tobacco or alcohol, also have the goal to discourage certain behaviors. To this end, research points out that showing the “before and after” prices of goods subject to “sin taxes” is more effective at discouraging consumption. In other words, making the tax more “visible” to consumers enhances its effectiveness.^[3] Michigan could increase the revenue from excise taxes, as well as keep up with inflation, by levying an ad valorem (a percentage of the sales price) tax on products such as cigarettes and alcohol, similar to how Michigan taxes marijuana.

Michigan allows qualified government units (whether that be a county or a city) to levy an excise tax on hotel and motel accommodations. Before 2024, a max rate of 5% was allowed for counties with less than 600,000 people, but Public Act 35 of 2024 increased the allowed max rate to 8%, with voter approval. Cities within these counties can also levy a separate tax with voter approval, like how Kent County did in August of 2024.^[4] In counties with more than 700,000 people, the maximum tax rate depends on the room size of where the accommodation takes place.

Almost all states rely on sales and excise taxes more than any other tax source, and Michigan is no exception — sales and excise taxes combined accounted for roughly 31.1% of state revenue in 2023.^[5] The reliance on sales and excise taxes is the most regressive feature of Michigan’s tax system. The Institute on Taxation and Economic Policy found that Michigan households with the lowest incomes, those earning less than $21,300 per year, spent 6.6% of their incomes on sales and excise taxes compared to the top 1% of households, which spent only 0.6% on such taxes. The inequities of consumption taxes are not only found across states but across the world, where greater reliance on consumption taxes is linked to greater levels of inequality.^[6]

Because a disproportionate share of Black, Hispanic, and Indigenous households are in groups with lower incomes as a result of past and present discrimination, policies that disadvantage households with low incomes will have a disproportionately negative effect on people of color. This is the case with sales and excise taxes because households with low incomes must spend a greater share of their income on consumption in order to make ends meet. As a result, households with low incomes pay a higher effective tax rate, meaning the percent of their income spent on consumption taxes is higher on average. Sales and excise taxes thus worsen racial inequity because they are based on spending rather than ability to pay.^[7]

Despite the regressive elements of sales and use taxes, the revenue streams are quite stable and resistant to business cycle forces, similar to the stability of property taxes. These otherwise regressive taxes are designated, most importantly, to the SAF. Close to 50% of the SAF in 2023 was funded through state sales and excise taxes. Additionally, nations with robust welfare systems rely more on consumption taxes relative to the U.S. to fund their public programs.^[8] The point is that having a diverse range of sources to extract revenue from, including the sales of goods and services, is important for developing effective public programs like social security and universal healthcare.

However, a concerning trend of base erosion regarding state sales taxes has been quietly occurring nationwide.^[9] Base erosion is when a tax base (the number of people or things subject to a particular tax) shrinks. For sales taxes, multiple pieces of legislation get introduced and signed into law that exempt new or different sales of goods or services from getting taxed, thus eroding the base. This base erosion is occurring at the same time as irresponsible lawmakers are pushing for the sales tax to replace revenue from the income tax. This will not only lead to falling revenues, but more regressive tax systems.

The income tax makes Michigan’s tax system less regressive than it would be otherwise. Besides, there are policies to mitigate the more regressive nature of the sales tax, such as sales tax rebates targeted to households with lower incomes as well as expanding the number of taxable goods that are largely enjoyed by households with higher incomes, such as digital services and services en masse.

Michigan is not alone in having a relatively antiquated sales tax system that primarily targets “goods” when the economy (both local and national) has been shifting to services. Additionally, households with higher incomes spend five times more on untaxed services compared to households with low incomes.^[10] Simply put, there are ways to make an otherwise regressive and reliable tax more equitable; a central goal for any tax system.

Michigan should increase revenue and make the tax system fairer by broadening the sales tax to include services. While the state may not want to tax all services, expanding the tax base to include certain luxury or leisure services, such as admission to professional sports events or membership fees to private country clubs, could raise revenue for the state. To ensure broadly taxing services does not contribute to a more regressive tax system, the state can provide an income tax credit or tax rebates for households with low incomes.
Michigan should increase revenue by joining the 32 states and D.C. currently taxing digital goods and services, including digital music and magazines, e-books, online newspapers, and digital TV and movies. As consumers redirect much of their spending from tangible to digital products, Michigan is likely to continue losing revenue until the Legislature takes action to tax goods that are sold and delivered online.^[11]
Michigan should join other states and allow local governments to levy their own sales taxes, upon voter approval. Local governments are largely reliant on property taxes, which can lead to them being susceptible to shocks and economic downturns. Local governments can diversify their revenue streams with an option to levy a local sales tax.

[1] “Outline of the Michigan Tax System.” Citizens Research Council of Michigan, 2025. https://crcmich.org/PUBLICAT/2020s/2025/TaxOutline_2025.pdf.

[2] “A Guide to Revenue Sharing.” Michigan Municipal League, 2019. https://mml.org/wp-content/uploads/2025/05/SMC-RevenueSharing-4Pger-Final.pdf.

[3] Daks, Martin. Review of “Sin Taxes Work Best When They’re Put on a Price Tag.” Chicago Booth Review. University of Chicago. December 9, 2022. https://www.chicagobooth.edu/review/sin-taxes-work-best-when-theyre-put-price-tag.

[4] “Outline of the Michigan Tax System.” Citizens Research Council.

[5] Review of “State of Michigan Revenue: State Source and Distribution.” 2025. House Fiscal Agency. December 2025. https://www.house.mi.gov/hfa/PDF/RevenueForecast/Source_and_Distribution_Dec2024.pdf.

[6] Blasco, Julien, Elvire Guillaud, and Michael Zemmour. 2023. Review of “The Inequality Impact of Consumption Taxes: An International Comparison.” Journal of Public Economics 222 (June). https://doi.org/10.1016/j.jpubeco.2023.104897.

[7] Davis, Carl, Misha Hill and Meg Wiehe. “Taxes and Racial Equity: An Overview of State and Local Policy Impacts.” Institute on Taxation and Economic Policy, March 2021. https://itep.org/taxes-and-racial-equity/.

[8] Review of “How Do US Taxes Compare Internationally?” Tax Policy Center. January 2024. https://taxpolicycenter.org/briefing-book/how-do-us-taxes-compare-internationally.

[9] Walczak, Jared. Review of “Modernizing State Sales Taxes: A Policymaker’s Guide.” Tax Foundation. September 5, 2024. https://taxfoundation.org/research/all/state/state-sales-tax-reform-guide/.

[10] Review of “Modernizing Illinois’ Sales Tax: A Pathway for a Sustainable Future.” Center for Tax and Budget Accountability. March 19, 2025. https://www.ctbaonline.org/reports/modernizing-illinois-sales-tax-pathway-sustainable-future.

[11] Mazerov, Michael. “States Should Embrace 21st Century Economy by Extending Sales Taxes to Digital Goods and Services.” Center on Budget and Policy Priorities, December 13, 2012. https://www.cbpp.org/research/states-should-embrace-21st-century-economy-by-extending-sales-taxes-to-digital-goods-and.