Michigan tax revenue runs roughly $10 billion or more each fiscal year, drawn mainly from a 4.25% flat individual income tax and a 6% sales tax, with smaller contributions from corporate, property, and excise taxes. The Michigan Department of Treasury collects all of it on a fiscal year that runs October 1 through September 30, then distributes it under rules set by the state constitution and statute.1National Conference of State Legislatures. FY 2026 State Budget Status A large share is earmarked for schools before it ever reaches the General Fund.
The Biggest Sources of Revenue
Individual Income Tax
The individual income tax is Michigan’s single largest revenue source. Gross collections cleared $5.8 billion in just the first several months of fiscal year 2025â26.2Michigan Senate Fiscal Agency. Monthly Revenue Report
Michigan taxes income at a flat rate. Everyone pays the same percentage of taxable income no matter what they earn. For the 2026 tax year that rate is 4.25%.3Michigan Department of Treasury. 4.25% Income Tax Rate for Individuals and Fiduciaries in 2026 Tax Year State law includes a trigger that can temporarily lower the rate when General Fund revenue growth outpaces inflation; it fired once, dropping the rate to 4.05% for the 2023 tax year before it reverted.4Michigan Department of Treasury. Treasurer Eubanks Announces Income Tax Cut for Michiganders
Most of this revenue arrives through payroll withholding. Self-employed workers and people with non-wage income pay in through quarterly estimated payments instead.
Sales and Use Tax
The sales tax is the second-largest source, bringing in more than $3.3 billion in the opening months of fiscal year 2025â26.2Michigan Senate Fiscal Agency. Monthly Revenue Report The rate is 6% on most retail purchases of tangible goods. A parallel 6% use tax applies to items bought from out-of-state sellers or otherwise used, stored, or consumed in Michigan.5Michigan Legislature. Michigan Compiled Laws 205.93 – Use Tax Rate Prescription drugs and most groceries bought for home consumption are exempt; prepared foods and restaurant meals are not.
How that 6% is split matters for where the money ends up. The Michigan Constitution breaks the rate into a base 4% and an additional 2% adopted in 1994. All revenue from that additional 2% goes directly to the School Aid Fund.6Michigan Legislature. Michigan Constitution of 1963 – Article IX Section 8 Sixty percent of the base 4% portion is also earmarked for schools.7Michigan Legislature. Michigan Constitution Article IX 11 – State School Aid Fund Well over three-quarters of total sales tax collections flow to Kâ12 education.
Corporate Income and Insurance Taxes
C-corporations pay a 6% corporate income tax on income apportioned to Michigan, using a single sales factor to determine how much of a multistate company’s income is subject to the tax.8Michigan Legislature. Michigan Compiled Laws 206.623 – Corporate Income Tax Insurance companies pay a separate 1.25% tax on gross direct premiums on Michigan property or risks, with a reduced rate on qualified health insurance.9Michigan Legislature. Michigan Compiled Laws 206.635 – Insurance Company Tax Together these two sources contributed over $700 million in the early months of fiscal year 2025â26.2Michigan Senate Fiscal Agency. Monthly Revenue Report
Property-Related State Taxes
Local property taxes fund local services, but two property-related levies flow to Lansing.
State Education Tax
Every property subject to local property tax owes a flat 6-mill state education tax.10Michigan Legislature. Michigan Compiled Laws 211.903 – State Education Tax One mill equals $1 of tax per $1,000 of taxable value, so a home with a $100,000 taxable value pays $600 per year. Local treasurers collect the levy, but the money goes entirely to the School Aid Fund.
Real Estate Transfer Tax
When real property sells for $100 or more, the state collects a transfer tax of $3.75 per $500 of value.11Michigan Legislature. Michigan Compiled Laws 207.525 – Real Estate Transfer Tax Rate On a $250,000 home, that’s $1,875. Counties charge their own $0.55 per $500 on top. Deeds between spouses and transfers tied to foreclosure or court orders are exempt. The state portion brought in $135 million through the early months of the current fiscal year.2Michigan Senate Fiscal Agency. Monthly Revenue Report
Excise Taxes
Motor Fuel
Gasoline and diesel are each taxed at 52.4 cents per gallon as of January 2026.12Michigan Department of Treasury. Tax Rates for Motor Fuel and Alternative Fuel The rate adjusts annually with inflation, capped at a 5% increase per year.13Michigan Legislature. Michigan Compiled Laws 207.1008 – Motor Fuel Tax Rate Collections fund highway maintenance, bridges, and other transportation infrastructure. The federal 18.4 cent per gallon tax applies on top of the state rate.
Tobacco
Cigarettes carry a state tax of $2.00 per pack. Other tobacco products, including cigars and smokeless tobacco, are taxed at 32% of wholesale price.14Michigan Legislature. Michigan Compiled Laws 205.427 – Tobacco Product Tax Rate The category generated nearly $197 million in the opening months of the current fiscal year, though receipts have been slowly declining with smoking rates.2Michigan Senate Fiscal Agency. Monthly Revenue Report
Adult-Use Marijuana
Licensed retailers pay a 10% excise tax on adult-use marijuana sales on top of the standard 6% sales tax.15Tax Foundation. Recreational Marijuana Taxes by State, 2025 Excise revenue now runs close to $100 million per distribution cycle. State law splits it four ways: 35% to the School Aid Fund, 35% to the Michigan Transportation Fund, 15% to municipalities hosting licensed retailers, and 15% to the counties where those retailers operate.16Michigan Legislature. Michigan Compiled Laws 333.27964 – Marijuana Revenue Distribution
Michigan Lottery
The lottery isn’t a tax, but it functions as a major revenue stream for schools. All lottery profit goes to the School Aid Fund, and the fiscal year 2025 contribution topped $1 billion. Cumulative transfers since 1972 have exceeded $30 billion.17Michigan Lottery. Where the Money Goes Of every dollar spent on tickets, about 25 cents reaches the School Aid Fund, 63 cents goes to prizes, 9 cents to retailer commissions, and 3 cents to lottery operations.
Where the Money Goes
Michigan does not pool all collections into one account. The constitution and various statutes direct revenue into dedicated funds before the legislature appropriates anything.
The School Aid Fund is the biggest beneficiary. It receives the constitutionally dedicated share of sales tax, the 6-mill state education tax, lottery profits, and 35% of marijuana excise tax collections. Higher education and school employee retirement obligations also draw from this fund.7Michigan Legislature. Michigan Constitution Article IX 11 – State School Aid Fund
Local governments get a cut of sales tax through constitutional revenue sharing. The constitution requires 15% of the 4% base portion of the sales tax to be distributed to cities, villages, and townships.18Michigan Department of Treasury. Constitutional Revenue Sharing A separate statutory revenue-sharing program adds further distributions that the legislature can adjust through the annual budget. For many smaller communities, those checks keep police departments staffed and roads maintained.
The General Fund covers most other state operations: corrections, public health, regulatory agencies, and the courts. It pulls primarily from the individual income tax and whatever sales tax revenue is not constitutionally earmarked. Because so much sales tax revenue is locked into education, the General Fund leans heavily on income tax collections.