Kevin Bain, senior strategist, public finance
Amidst the back and forth of announcements coming out of the Trump administration, tariffs have dominated headlines—and for good reason. Michigan’s economy is deeply tied to the auto industry, and these tariffs could have far-reaching consequences.
But there’s another looming threat: the broader impact of tariffs on Michigan’s public services. Sales tax revenues, which fund everything from schools to local government operations, could take a major hit as higher prices curb consumer spending. If policymakers and business leaders don’t prepare for the ripple effects, the result could be a financial squeeze on schools, local governments and other essential public services.
What’s the threat?
Michigan collects a 6% sales tax, but the State keeps less than a quarter of it. Over 65% flows into the school aid fund. Another 13% gets distributed to local governments through revenue sharing. These funds are crucial for services like classroom resources, clean parks and public safety.
Tariffs could have a completely different impact than the inflation of the past several years that bolstered government budgets. To understand why, consider how sales and use tax revenues have increased and supported state and local government budgets since 2020.
As inflation raises the cost of goods, the taxable sales price of items goes up. With Michigan’s 6% sales tax, higher prices generate more tax revenues. Even as inflation surged in mid-2021, strong consumer sentiment fueled continued high spending. The combination of these factors resulted in greater sales tax revenues.
Michigan sales and use tax revenues grew 33% before the pandemic, from $10 billion in 2019 to $13.4 billion in 2023. Total tax revenues only grew 25% over the same period, meaning consumer spending had an outsized impact on supporting the state’s budget. The only state revenue sources that grew faster over the same period were corporate income taxes and federal funds — hot topics for another time.
In comparison, during that period, the consumer price index (CPI) showed a 23% increase in prices. So the 33% growth in sales tax revenues outpaced inflation thanks to strong consumer spending. Therefore, the state, local governments and school districts could grow their budgets and deliver valuable services.
As long as the economy remains strong, sales tax helps government budgets manage rising costs. Michigan weathered high inflation after the pandemic because consumers remained optimistic about the economy and bolstered it with strong spending.
Those days are over.
The University of Michigan consumer sentiment index (CSI) plummeted to its lowest level since 2022, falling from 74.0 in December 2024 to 50.8 in April 2025. That’s the second-lowest reading in the survey’s history, which goes back to 1952. CSI is a leading indicator of recession since it measures consumers’ expectations for the future.
Downward trending CSI indicates a slowdown in consumer spending. If tariffs raise the cost of goods and trigger downward spending pressure on Michiganders, the net impact to sales tax revenues would be depressing to say the least. Higher prices will likely force Michiganders to spend more of their income on nontaxable items like groceries and housing, further reducing discretionary purchases that drive sales tax revenues.
Estimating the fiscal impact
While precise estimates of tariff-induced revenue declines are challenging, Public Sector Consultants analyzed past trends for a rough guideline. If Michigan’s sales tax revenues return to prepandemic levels, the decline could amount to hundreds of millions of dollars annually.
The state’s sales and use tax revenues have already begun stagnating, remaining at $13.4 billion in 2022 and 2023. The Michigan Department of Treasury projects a dip in 2024 to $13.3 billion and modest growth in 2025. As tariffs come into effect, we could see a reversal in sales tax revenues.
Policy considerations
Tariffs will have other impacts beyond sales. Companies may choose to absorb part of the tariffs rather than passing full price increases to customers, impacting their bottom lines and decreasing corporate income tax revenues. Job losses due to rising costs would decrease personal income tax revenues while increasing unemployment insurance costs.
Furthermore, proposed federal spending cuts will further constrain state, local government and school budgets. Considering these potential revenue declines, Michigan policymakers may need to reconsider revenue projections. A prolonged slowdown in consumer spending might necessitate adjustments to tax policy to maintain budget stability.
Michigan’s policymakers must approach the challenges ahead with a clear sense of direction. The impact of tariffs will not be limited to Michigan’s key industries and jobs but will pervade most major revenue sources and hamper services people rely on.
Public Sector Consultants is a nonpartisan research and consulting firm committed to solving public policy problems that improve the quality of life for the residents of Michigan and beyond. A certified Women-Owned Small Business and a Women’s Business Enterprise with offices in Lansing and Detroit, we partner with engaged clients to develop and implement actionable public policies. Since 1979, PSC has served hundreds of clients spanning government agencies, philanthropic organizations, nonprofits and associations.