Investigative
7:30 am
Fri January 28, 2011

Michigan legislature considers tax increase on working poor

The idea of an Earned Income Tax Credit, giving people who have low-income jobs a bit of a tax break, has been around for a while.  In 1975, a Michigan Republican, Gerald Ford, signed the first federal credit into law while he was president.

Since then, the federal credit has been expanded by subsequent presidents, including Ronald ReaganPresident Reagan had high praise for it as a part of the Tax Reform Act of 1986.

“It’s also the best anti-poverty bill, the best pro-family measure, and the best job creation program ever to come out of the Congress of the United States.”

The Earned Income Tax Credit was popular because gave people an incentive to get off welfare and go to work.  Prior to the credit, a person on welfare would find it paid more to stay on public assistance because by the time taxes were taken out of the paycheck, they were worse off financially. 

Alex Rosaen is a Consultant with the Anderson Economic Group.  He’s written on the issue.

“The original kind of revolutionary idea with the Earned Income Tax Credit as opposed to simply providing families with direct cash aid was that it flipped things upside down; it got the incentives right instead of getting them wrong.”

So, that federal credit became a basic building block of the welfare-to-work effort.

Over the years, states started picking up the idea, giving a break to the working poor on state taxes.  Michigan took up the issue in 2006.  Democratic Governor Jennifer Granholm worked with the Republican held legislature to combine a minimum wage increase with a Michigan Earned Income Tax Credit to help out low-income wage earners.

Stephanie Cepak is a staff writer with the Gongwer News Service.  She says this tax break is limited.  First, you gotta get a job.  Then…

“There are qualifications on how much you can earn, depending on your family size.  The benefit ranges from $91 to a few hundred dollars for the tax credit in general.”

The top of the earnings limit to get the credit is a little more than $38-thousand for a family of five… but most of the qualifying families make a lot less than that.  We’re talking families trying to get by on $10-thousand / $12-thousand a year in some cases.

Last year the credit ended up giving an average of $400 to low and moderate income workers. 

Now, $400 doesn’t sound like a lot.  It’s 20% of what the federal Earned Income Tax Credit pays out.  But Alex Rosaen at Anderson Economic Group says $400 could go a long way toward a car repair, or pay for replacing a couple of bald tires and leave a worker money left over to pay for work boots that are required for the job.

“A catastrophic car repair that makes it so that people can’t get to work is just the type of thing that can take a family that’s on the edge of really going into a tailspin and push them over that edge.”

And back onto welfare.

As they’ve become aware of the Michigan credit, more people have signed up.  And, when the economy tanked, and people saw their wages cut or lost their job and had to take a lower-paying job, more and more people have become eligible for the Michigan credit.  With those huge increases, the current budget indicates it’ll end up costing the state $338-million for the year, a lot more than anyone was expecting when it was passed in 2006.

Stephanie Cepak at Gongwer reports when the newly elected Republicans in the House issued a news release indicating they’d be reviewing all tax credits, exemptions and deductions, the elimination of the Michigan Earned Income Tax Credit stood out.

“The House Republicans decided that, in their release of talking about the review of the tax credits, that they were singling out the Earned Income Tax Credit at first.  That they believe that it’s a program  --not that it’s not necessarily working--  but it’s such a large chunk of the budget, we’re talking over $300-million, that perhaps it’s just a time to get rid of it, that Michigan can’t afford it at this time.”

That’s exactly what the new leader of the House says.  Speaker Jase Bolger says he doesn’t think the state can afford the Michigan Earned Income Tax Credit and he believes it should be eliminated.

“This is a new credit along with several others.  I want to evaluate them.  And I think that it’s one that I lean to we shouldn’t be doing.  It was instituted at a different time although it was a very recent time.  It was not that long ago that the Earned Income Tax Credit did not exist in Michigan.  So, I think at a price tag of over $330-million a year, it’s something we have to look at.”

But if the state does eliminate the Earned Income Tax Credit, it might not save that $338-million.  Some estimate the budget would only save about half that amount.  That’s because some of those low-income workers might end up back on welfare.  That will cost the state more money… and it’ll lose revenue through other taxes those workers had been paying.

And… eliminating the state credit could jeopardize Michigan’s ability to get a big federal grant that helps the poor.  Gretchen Whitmer is the Democratic leader in the Senate.  She says the TANF grant is critical for Michigan, especially in these times.

“TANF stands for Temporary Assistance for Needy Families.  And Michigan draws down almost a billion dollars annually.  The federal government requires that Michigan match those dollars up to $500-million.    Forty-three percent of that match comes from the Earned Income Tax Credit.  So, half of that is from this tax credit.  So, we stand to lose almost half-a-billion dollars in this state that helps the poorest people in our state.”

And Senator Whitmer says eliminating the Michigan Earned Income Tax Credit is bad for Michigan’s working poor and potentially bad for the state budget.

“It’s morally reprehensible, but it’s also fiscally ridiculous.  To say that this is a net savings to the state is ludicrous.  Whoever’s saying that either doesn’t know enough of what they’re talking about or just simply hasn’t done the groundwork to understand what it means.”

Republicans say they’ll find a way to make sure they have the matching funds for that big federal grant.  And, Speaker Jase Bolger says Michigan’s low-income workers will still be getting some help from Washington, just not that supplemental check from the state.

“The federal EITC is still there and will still exist.  So, we’re talking about an additional check written to citizens for that.  I think, really, above all is what we need to make sure that we get Michigan workers back to work and to do that we have to live within our means, we have to adjust our expenses.”

If the Michigan Earned Income Tax Credit is eliminated, no matter how you slice it, lower-income families will be paying more in taxes to preserve tax breaks for others.