Taxes on Consumers
GLOSSARY
Base In
taxation, the dollar value on which a tax is levied.
Consumption tax A
levy on consumer goods.
Intangible property A
financial asset having no intrinsic value but representing value—e.g.,
securities, accounts receivable, notes.
Nexus The minimum
physical presence or link to a state that would subject a business
to a state's tax system and require the business to collect and
remit taxes.
Remote sales Usually,
catalog and Internet purchases.
Sales tax A flat
percentage levy on an item's selling price: in Michigan, 6 percent.
Tangible property Any
property other than real estate or money that has physical substance
and can be touched—e.g., furniture, cars, jewelry.
Use tax A levy on
a good's initial use (as opposed to one levied on its sale). In
Michigan the use tax applies to (1) items purchased out of state,
and (2) items used or stored in the state; it also applies to private
used-car transactions.
BACKGROUND
Sales and Use Taxes
[APRIL 1, 2002] Article IX, section 8, of the Michigan
Constitution provides for a sales tax on retailers of no
more than 6 percent of their gross tangible sales of personal property.
The constitution also requires that at least 73 percent of the revenue
generated by the levy be dedicated to funding K–12 education.
Any hike in the sales tax rate must be accomplished through a constitutional
amendment.
The sales tax base consists of most final retail transactions
of goods in the state. The major exceptions are
- prescription drugs;
- food for human consumption except that for immediate
consumption (i.e., most food bought at a grocery store is exempt,
but food bought at a restaurant is not);
- business purchases used for resale;
- most services;
- residential heating fuel, which is taxed at only
4 percent; and
- purchases by government agencies and eligible nonprofit
organizations.
Michigan also levies a use tax based on use
or storage of certain property in the state—that is, goods
bought outside the state but used in Michigan are exempt from the
sales tax but subject to an identical 6 percent use tax. Use taxes
were devised by states to offset the loss of sales tax revenue when
goods are purchased out of state and also to remove the disadvantage
to local businesses of competing with out-of-state firms. Some services,
such as hotel room rentals and telephone service payments, also
are subject to the use tax and so are private used-car transactions.
In FY 2000–01 the state sales tax generated
about $6.4 billion, while the use tax raised another $1.3 billion
for a total of $7.7 billion. Of sales tax collections,
- 73 percent are deposited in the School Aid Fund,
to be used for K–12 education;
- 24 percent go to local units of government, through
revenue sharing; and
- 3 percent go to the state's general and transportation
funds.
Of use tax collections,
- 33 percent are deposited in the School Aid Fund;
and
- 67 percent are deposited in the General Fund.
Exhibit 1 shows the changes
in sales and use tax revenue for three representative years. In
1984 they generated $2.2 billion, more than 17 percent of total
state revenue. By 1997 revenue had risen to $6.5 million and the
percentage to 22 percent. The reason for the increased collections,
both in absolute terms and as a percentage of total revenue, is
the 1994 rate increase, from 4 percent to 6 percent, brought about
by the school-finance reform package known as Proposal A; this raised
the sales/use tax rate for the first time in more than 30 years,
and all the additional revenue is dedicated to K–12 education.
In 2001 collections were down as a share of total state revenue,
in part because of an economic slowdown.
Exhibit 2 presents FY 1985–2001
actual and inflation-adjusted annual collection data. Tax collections
rose every year but one (1991), but after adjusting for inflation,
they essentially were flat from 1986 to 1993. Tax collections rose
sharply following the rate increase, then slowed slightly, increasing
at an annual rate of 2.8 percent (adjusted for inflation), then
in FY 2001 fell about 2 percent.
All but five states levy a sales tax, most in the
3–7 percent range. Unlike Michigan, many allow some local
governments (usually counties or high-population cities) to levy
a separate sales tax in addition to the state levy.
Taxes on Remote Sales
Sales/use tax revenues are being eroded by remote
(mail order and Internet) sales, and the revenue lost is becoming
a serious fiscal problem for state and local governments. The Michigan
Department of Treasury estimates that in FY 1999–2000 the
state loss was $187 million and by FY 2004–05 will be about
$350 million.
There are a number of legal and practical issues that
keep states from collecting taxes on remote sales, among them the
U.S. Supreme Court ruling that mail-order and Internet firms that
do not have nexus (the minimum physical presence or link
that requires them to collect taxes or be subject to a state's tax
system) in a state are not required to collect taxes from buyers
living in that state.
Resolving the issues related to taxing remote sales
will require either voluntary compliance by remote retailers or
congressional action. To help increase compliance by Michigan residents,
the state has taken the unique approach of adding a line on the
personal income tax form for calculating the amount of tax owed
on remote purchases. This has met with some, but limited, success:
For tax year 2000, the state collected about $3.1 million from 80,150
filers.
To address the tax collection and related issues,
the Streamlined Sales Tax Project, a cooperative effort among retailers,
remote-sales retailers, state and local governments, and national
organizations, has been initiated. Its purpose is to simplify state
sales-tax laws and rates and provide incentives for remote firms
to voluntarily collect and remit the tax.
Other Consumption Taxes
On Tobacco Products
Michigan, like most states, imposes a tax, which is
collected from wholesalers on all tobacco products: cigarettes,
cigars, non-cigarette smoking tobacco, and smokeless tobacco. The
current tax was adopted in 1994, replacing the original cigarette
tax, which was adopted in 1947. The rate is
- 37.5 mills per cigarette, or 75¢ a pack; and
- 16 percent of the wholesale price on all other
tobacco products.
The U.S. median per pack cigarette tax rate is 34¢
(January 1, 2002), ranging from $1.425 in Washington to 3¢
in Kentucky. Michigan's is the second highest rate in the Great
Lakes region (Wisconsin's is 77¢); in Indiana and Ohio, which
adjoin Michigan, the rates are 15.5¢ and 24¢, respectively.
Tobacco taxes generated about $596 million for Michigan
in FY 2000–01. Of the cigarette tax collections,
- 63.4 percent are deposited in the School Aid Fund;
- 25.3 percent go to General Fund;
- 6 percent go to the Healthy Michigan Fund; and
- 5.3 percent are deposited in the Health and Safety
Fund.
Of the non-cigarette tobacco tax collections,
- 94 percent go to the School Aid Fund; and
- 6 percent go to Healthy Michigan Fund.
Cigarette smuggling, both organized and casual, of
cigarettes from Canada and other lower-tax states has been a problem.
Not only does Michigan's high tax rate contribute to the problem,
but until 1998, so did the absence on cigarette packs of any physical
evidence that the tax had been paid.
In 1998 the state began to require a tax stamp on
each pack of cigarettes, and experience is showing a benefit to
enforcement and revenue. Smuggling is significantly down and tax-collection
revenue is up. Taking into account the long-term decline in tobacco
consumption that likely occurred, the cigarette stamp program saved
the state an estimated $90–95 million over the first two years
of the program. From FY 1998–99 to FY 2000–01, collections
fell about 3 percent, about that expected from reduced cigarette
consumption, indicating that little smuggling now is occurring.
On Beer
Michigan's beer and other alcoholic-beverage taxes
originally were levied in separate statutes that were repealed and
replaced by Public Act 58 of 1998.
Michigan has taxed beer since 1933 and currently imposes
a levy on beer manufactured or sold in the state. A credit is allowed
for beer shipped out of state or sold to a military installation
or Indian reservation.
A tax of $6.30 per barrel is imposed, with a $2 per
barrel credit for brewers producing less than 20,000 barrels annually.
The rate has not changed since 1966, when it was reduced from $6.61
per barrel. Nationwide, rates range from 63¢ per barrel (Wyoming)
to $29.30 (Hawaii). In the Great Lakes region, Michigan's rate is
highest, and Wisconsin's, at $2.05, is lowest.
The Michigan beer tax generated about $45 million
in FY 2000–01. The proceeds go to the General Fund.
On Wine
Michigan first imposed a wine levy in 1933. The tax
is levied per liter, a credit is allowed for that shipped out of
state or sold to military installations or Indian reservations,
and the rates are
- 13.5¢ per liter for wines made from imported
grapes and having 16 percent or less alcohol;
- 20¢ for wines made from imported grapes and
having more than 16 percent alcohol;
- 1¢ for wines made in Michigan from domestic
grapes or fruit; and
- 48¢ for mixed spirit drinks (e.g., “wine
coolers”).
Per gallon, the Michigan tax equates to 51¢,
second highest in the Great Lakes region. Only Illinois, at 73¢
a gallon, is higher.
The Michigan wine tax generated about $6 million in
FY 2000–01, and the proceeds go to the General Fund.
On Liquor
Michigan has taxed the retail price of spirits since
1959. Currently, a rate of 12 percent is levied on spirits sold
for on-premise consumption and a rate of 13.85 percent on spirits
sold for off-premise consumption.
The tax generated about $87 million in FY 2000–01.
Of the collections,
- 29 percent go to the General Fund;
- 29 percent go to the School Aid Fund;
- 29 percent go to the Convention Facility Development
Fund; and
- the remainder goes to the Liquor Purchase Revolving
Fund.
Other
The property tax, which affects virtually all adults
because it is paid directly by all landowners and indirectly by
all renters, is not a consumption tax and is not discussed here.
Readers interested in the property tax are referred to “K–12
Funding” and “Taxes on Businesses,” elsewhere
in this book.
Motor-vehicle fuel taxes also affect virtually everyone,
either directly, at the pump, or indirectly through the taxes' effect
on the cost of goods and services. Motor-vehicle fuel taxes are
discussed in “Highway Funding and Safety.”
DISCUSSION
Sales and Use Taxes
Debate about sales/use taxes in Michigan centers primarily
on three issues.
- Should the taxes be extended to services?
- Do the taxes disproportionately affect the poor?
- Should the state rely on levies that taxpayers
cannot avoid but cannot deduct from their federal income tax liability?
First, the current sales/use tax base is shrinking
relative to the economy as a whole. These taxes historically have
been levied on the sales/use of tangible goods. Most services—ranging
from professional business services to dry cleaning—have been
exempt. However, as the state has changed, the proportion of the
economy subject to the taxes has diminished. For example, in 1977
only 12.3 percent of the Michigan economy (private-sector gross
state product) was attributed to service industries (and, therefore,
in large part exempt from consumption taxes), but by 1999 that percentage
had risen to 21.8 percent. This trend will continue, which means
that Michigan is relying on a consumption tax base that is shrinking
each year relative to the economy as a whole. If Michigan were to
extend the consumption taxes to services (the fastest growing sector
of the economy), estimates are that state revenue would be boosted
by more than $2 billion annually. Others assert that taxing services
would dampen growth of the state's most dynamic economic sector.
Second, Michigan's sales tax exemptions for most food
and medicine are intended to ease the tax's hardship on lower-income
families, but some observers believe the hardship should be further
reduced and the revenue loss offset by an increase in the state
income tax. In the past, most analysts thought consumption taxes
to be slightly regressive, meaning that their burden (relative to
available income) is reduced as one earns more income. In recent
years, however, tax fairness is beginning to be judged by its lifetime,
rather than annual, burden on income. Analysts using the new measure
conclude that the relative burden of consumption taxes is roughly
equal for all income groups.
Third, since the mid-1980s sales/use taxes may not
be deducted against one's federal income tax liability. Some analysts
argue that this change has raised the total burden of the sales/use
taxes compared to other state levies. For example, if Ms. X itemizes
on her federal return, the after-tax cost of $100 in local property
taxes is $100 minus her marginal federal tax rate—on average,
about $75. But since consumption taxes may not be itemized, the
after-tax cost of $100 in sales/use taxes is $100. While not disputing
this point, some analysts downplay federal deductibility's importance.
They point out that deductibility is irrelevant for the majority
of taxpayers, since most do not itemize on their federal return
(in a typical year, only one-third of Michigan taxpayers itemize
at the federal level, and those who do tend to be at the higher
end of the income scale).
Some analysts point out that sales/use taxes have
certain advantages.
- Some portion of the tax burden may be exported
to non-Michigan residents who travel into this state. An estimated
5–15 percent of all Michigan sales/use tax revenue comes
from sales to nonresidents.
- Some point out that the public finds sales/use
taxes more palatable than other levies because purchases are made
at the consumer's discretion. A family may forgo, delay, or accelerate
buying items subject to the sales tax, depending on current circumstances.
- Some believe an important criterion of a good state
tax system is “balance”—having roughly the same
reliance on all revenue sources. In Michigan, since the 1994 sales/use
tax increase, the state annually generates roughly about the same
amount from both consumption taxes and income taxes.
Taxes on Remote Sales
The most serious problems in collecting taxes on remote
sales are the wide differences in (1) rates levied by state and
local governments and (2) how the thousands of taxing jurisdictions
define what is taxable and what is not. If the states can simplify
and standardize tax law and collection procedures, the undue burden
that the multitude of rates/definitions imposes on remote-sales
merchants would be eliminated, weakening the position that the Commerce
Clause of the U.S. Constitution excuses firms without nexus from
collecting the purchaser's state tax.
The most recent remote-sales action in Michigan is
P.A. 122 of 2001, which makes Michigan a partner with 19 other states
in the Streamlined Sales Tax Project, which has as its objective
developing a way to collect state taxes on Internet, catalog, and
telephone sales. The law's provisions
- allow the state to enter into a multistate sales/use
tax agreement;
- create a board of governors that can represent
the state in relevant meetings with other states;
- provide for registering Internet and catalog sellers,
who would have to select a way to collect and remit sales/use
taxes;
- allow Internet and catalog sellers to contract
with certified service providers for collecting and storing the
taxes;
- permit use of an automated system to calculate
each jurisdiction's tax on a transaction;
- limit Internet/catalog sellers' liability for taxes
on transactions made before a seller registers; and
- provide for consumer privacy.
Supporters of taxing remote sales point to the revenue
it would bring in, which is especially important because three-quarters
of state sales tax revenue goes to K–12 schools and about
one-third to local units of government. They also assert that there
are fairness issues: Taxing remote sales would assure fairness to
(1) Michigan merchants who must compete against remote merchants
and (2) people who cannot afford computers to do their shopping.
Opponents also cite fairness issues: They say that
(1) Internet and catalog vendors with no physical presence in a
state receive none of the benefits of the taxes they would have
to collect and remit at some expense to themselves, and (2) consumers
who buy from home are not using the roads or many other state services
they use when they go to a store. Opponents also are concerned about
privacy. They say one of the advantages of the sales tax over other
taxes is anonymity—in a store, shoppers do not have to give
their name or address, and their buying habits are not tracked;
a national, third-party tax-collection system may require such individual
information.
Tobacco and Alcohol Taxes
Current public policy debate in Michigan about tobacco
taxation revolves primarily around how the revenue is spent. Some
wish to see more go directly into tobacco-use prevention and cessation
programs. Others believe that state prevention and cessation spending
is adequate, pointing out that in addition to specific programs,
the state addresses tobacco use through school and health programs.
There currently is no public policy debate in Michigan
on the subject of alcohol taxes.
See also Highway Funding and Safety; K–12
Funding; Local Government Organization and Issues; Taxes on Businesses;
Tobacco Settlement.
FOR ADDITIONAL INFORMATION
Citizens Research Council
Michigan National Tower, Suite 1502
124 West Allegan Street
Lansing, MI 48933
(517) 485-9444
(517) 485-0423 FAX
www.crcmich.org
and
3877 Six Mile Road, Suite 201A
Livonia, MI 48152
(734) 542-8001
(734) 542-8004 FAX
www.crcmich.org
Michigan Chamber of Commerce
600 South Walnut Street
Lansing, MI 48933 (517) 371-2100
(517) 371-7224 FAX
www.michamber.com
Michigan Department of Treasury
430 West Allegan Street
Lansing, MI 48922
(517) 373-3200
www.michigan.gov/treasury
Senate Fiscal Agency
Victor Center, Suite 800
201 North Washington Square
P.O. Box 30036
Lansing, MI 48909
(517) 373-2768
(517) 373-1986 FAX
www.senate.michigan.gov/sfa
Streamlined Sales Tax System for the 21st Century
www.geocities.com/streamlined2000
CONTENT CURRENT AS OF APRIL 1,
2002
© 2002 Public
Sector Consultants, Inc.
Sponsored by the Michigan Nonprofit Association and the Council
of Michigan Foundations
www.michiganinbrief.org
 
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