TAX POLICY GLOSSARY

Ad valorem tax: Ad valorem is translated from the latin “according to the value” and is a tax based on the assessed value of something. The property tax is an ad valorem tax.

Base erosion: When a tax base for a given tax shrinks. The sales tax has undergone a base erosion as of late due to a shift from goods to services, which are not typically taxed.

Capital gains tax: A tax that is paid on the increase of a capital asset, such as a house or a company stock. When the taxpayer sells the capital asset for a higher price than when they bought it, they incur a “gain” and thus pay taxes on that difference.

Child Tax Credit (CTC): A refundable tax credit targeted to help families afford the cost of raising children. At the time of writing, Michigan does not have a state CTC, and only Michiganders can claim the federal CTC.

Consumption tax: A tax levied when someone purchases a good or service. The state sales tax is a consumption tax.

Double taxation: When income, or the same tax base, gets taxed twice. This is said to occur when separate taxes are levied on the same income or profits but paid by separate taxpayers (e.g., corporate profits taxed at both the entity levels and shareholder levels) or when the same tax base is taxed by two or more different taxing authorities.

Earned Income Tax Credit (EITC): A refundable tax credit targeted to families with low and moderate incomes. Eligible Michigan workers can take advantage of both a federal and state EITC.

Effective tax rate: The share of income an individual pays in taxes. Also referred to as the “average tax rate.”

Estate tax: A tax on wealth that has been handed down from a benefactor to a beneficiary. The tax is levied on the benefactor upon death and paid by the estate. 

Flat tax: A tax that charges the same rate regardless of income. Michigan’s income tax is flat.

Flow-through business: A legal form of business where the business owners get taxed as individuals rather than the business entity getting taxed.

General Fund/General Purpose (GF/GP): The state’s main operating fund for which revenues are not specifically dedicated to any particular purpose.

Graduated tax: A tax where the rate increases with income. The federal income tax is graduated. Also referred to as a “progressive tax.”

Horizontal equity: The principle in tax policy that taxpayers in similar economic circumstances should be treated the same in the tax code.

Inheritance tax: A tax on wealth that has been handed down from a benefactor to a beneficiary. The tax is levied on the beneficiary(ies).

Land value tax: A tax that is levied on the land itself without regarding the values of the properties on said land. This is to encourage development and not risk shrinking that tax base. 

Mansion tax: A progressive real estate transfer tax, levying a higher tax on more valuable properties, like properties with a sales price of more than a million dollars (i.e., mansions).

Marginal tax rate: The amount of additional tax paid for every dollar earned as income.

Net Investment Income Tax: A progressive tax levied on passive income.

Net taxable income: Adjusted gross income, after deductions and exemptions, on which one pays tax.

Nonrefundable credit: A tax credit that can only cover up to the amount owed in taxes. If a person owes $100 in taxes but qualifies for a $200 nonrefundable credit, the person’s tax credit will only refund back $100.

Passive income: Income earned from activities that one is not actively involved in (employment, self-employment, etc…), such as income earned from rent or income from a trust.

Real estate transfer tax: A tax that is levied when real property is sold (either homes or business properties). This is a one-time tax.

Refundable credit: A tax credit that will be paid even if it exceeds one’s tax liability, such as the EITC. If a person owes $100 in taxes but qualifies for a $200 refundable credit, the person will still receive the full $200.

Regressive tax: A tax where the effective tax rate is higher for households with low incomes than households with high incomes. The sales tax is a regressive tax.

Revenue sharing: State funds provided to cities, villages, and townships to pay for core governmental services, established to offset restrictions in local taxes. 

School Aid Fund (SAF): The state’s second largest fund, which primarily supports public schools and K-12 education programs. A small portion (about 7% in fiscal year 2025) also helps fund community colleges and higher education.

Tax base: The total amount of property, income, sales or other activity subject to taxation. 

Tax credit: Claims that reduce one’s tax bill. Popular examples include the Earned Income Tax Credit, the Child Tax Credit, and the Lifetime Learning Credit. Not to be confused with a deduction.

Tax deduction: Items or activities that can be claimed to reduce one’s tax base. Examples include state and local tax (SALT), charitable contributions, and medical expenses, among others. Not to be confused with a credit.

Tax incidence:  Refers to who actually ends up paying the tax and how much, regardless of what the law states. Despite the payroll tax legally falling on both workers and employers, the tax falls almost entirely on workers.

Tax rate: The percent owed on property, income, sales or other taxable activity.

Vertical equity: The principle in tax policy where those with the ability to pay more should pay more in taxes.

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