Mom with dementia should no longer be renewed for the sake of driving, but what form of of ID is she to use?

Yes, a state issued non driver id issued through motor vehicle.

State Issued ID is the way to go. If she intends to fly or take a train to another state, an expired ID will not work.

My mom still has her license, but has not driven for more than 1.5 years. They don't expire here for 5 years. Which is too long for seniors. New Hampshire used to make folks over 65 take a driving retest every 5 years but a few years ago they stopped that. I think it was a good idea for seniors and actually not a bad idea for many younger drivers...maybe a lottery of when you need to be road tested! It was a bit easier taking the keys away if they could not pass the driving test.

Mom longs to drive again, her wings have been clipped and there are many days that I am not able to drive either so our options are limited. She circles every "safe driving for seniors class" offered by local AARP and AAA.

My parents still use their old driver's licenses even though said licenses have expired. Nothing on their licenses had changed.

Yep, in Indiana too we have a State ID. You get it at the BMV, but it isn't a driver's license. I think the picture may have a different background color, and/or it may be oriented Portrait (up and down) instead of landscape (side to side.)

In Texas, we have a state issued picture ID that looks like a driver's license and is obtained at the same place. It never expires. And it wouldn't be mistaken for a driver's license as it very specifically states IDENTIFICATION CARD.

There is no retesting that goes along with renewing an elder's driver's license.

The state also offers a generic ID that can be obtained at the license bureau. Also, your mom can still have a drivers license. It doesn't mean she's going to drive off somewhere.

Michigan offers a non-driver ID, now would be the best time to make the change.