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Taxing the working poor

Bill Rice
Rick Snyder talked about reinventing Michigan on the campaign trail (Snyder at the Republican Convention in 2010). Now, Governor Snyder says he's creating a "level playing field that encourages economic growth" with his budget proposal.


When the budget was introduced, it was left to Lieutenant Governor Brian Calley to explain some of the details.  Among them was the Governor’s proposal to eliminate the Earned Income Tax Credit, a move that would take away a tax break for the state’s working poor.

“Now, the Earned Income Tax Credit is a piggy-back on the federal Earned Income Tax Credit which is five times larger. Now, the policy behind it, which is to incent work, is a good one and it’s one we believe is accomplished with the federal credit. We don’t believe there is any additional incentive to adding it to the Michigan income tax code. We would rather take those resources and make sure that we’re able to do things like maintain Medicaid access, for example.”

Later, Lieutenant Governor Calley, the state’s Budget Director and Governor Snyder met with reporters to take questions.

I was there and I said to the Governor, “You’re going to be accused of raising taxes on the working poor, raising taxes on pensioners to give your business friends a break.  Tell me why that’s not true.”

“I think you’ve already made those claims in a number of publications in terms of what I’ve seen so far. That’s not true.”

The Governor then explained why Michigan needed to lower business taxes, how some business owners were being taxed on what their business made and again in income taxes, a double-tax as he put it.  The Governor says the proposed $1.8 billion dollar tax cut for businesses would ultimately be good for all of Michigan.

“So, this is really creating a fair, consistent, level playing field that encourages economic growth and deals with people at lower income levels to say our goal is not to penalize those people, but to, in fact, make sure we’re creating a good safety net and programs to help them get jobs and thrive in the long-term. That’s what this is all about, creating an economy for the future.”

But to lower taxes for businesses, the state is cutting money for K-12 schools, public universities, cutting state employee benefits, cutting the share of tax dollars going to counties, villages, townships and cities and increasing taxes on retirees who get pensions and eliminating the Earned Income Tax Credit for working people at the bottom of the economic ladder.

Snyder’s Budget Director, John Nixon, says the state just cannot afford that tax credit.

“But, really it’s a significant amount of money, it’s almost $400-million in 2012. The Earned Income Tax Credit, this is a payment that folks get once a year which I’m sure helps them when they get it. But, when looking at the whole spectrum of services that the state offers this population, you have to say, boy, if we’re going to cut a billion-and-a-half dollars, what cherries do we want to protect the most? So, when you start looking at Medicaid in particular, you say, boy, do we want to cut Medicaid dramatically? This is a service these folks are using everyday. You know, do you want to cut provider rates where you have doctors saying we’re just not going to see patients anymore. It limits access. It’s a bigger problem.”

The Snyder administration has often noted that it’s not cutting Medicaid as other states are doing.  And it implies that cutting the Earned Income Tax Credit makes that possible, although you could make the argument that not cutting the business tax quite so much could do the same.

Nixon says there’s another reason to eliminate the Earned Income Tax Credit… that is the same reason the Snyder administration wants to eliminate all the business tax credits it can… there’s no way to control the cost.  It goes up as more people qualify for it.

“You know, because when that Earned Income Tax Credit was put into place, it was a much cheaper program than it is today. And all of a sudden it grows, it’s the same like these other credits. You know, they pass these credits and they may be $50-million this year, but they’re going to be $200-million in two years.
LG: "But it grows because there’s a greater need."
"There is a greater need, but we do believe that by re-setting the system, getting a stable budget in place, by getting a stable tax structure in place, we’ll be able to build a strong foundation upon which we can grow.”

The Michigan League for Human Services has been crunching the numbers proposed in Governor Snyder’s budget. 

Right now, a family of four making $25,000 would pay no state income tax and get a credit refund of $406.  Under the Snyder budget plan, they would not get that $406 and pay $450 in income tax, a net difference of $856.  That’s a lot of money for a family trying to make it on $25,000 a year.

Many states make allowances for low-wage workers by utilizing a graduated income tax.  Low income families pay a lower rate, wealthier families pay at a higher rate.  Michigan has a flat tax and under the Snyder proposal that would be 4.25%.

Gilda Jacobs is the President of the Michigan League for Human Services.  She says the eliminating the Earned Income Tax Credit will be felt by low wage families.

“The research that has been done shows that without the EITC, 25-thousand more families will fall below the poverty line and out of those 25-thousand families we have 14-thousand kids.”

She says this goes the opposite direction Governor Snyder has said he wants to go.  In his State of the State speech, the Governor introduced his ‘dashboard,’ a set of measurements to see if the state was moving in the right direction.  One of the measurements was child poverty.

“I have to scratch my head to think why would we do something that would intentionally –because it is intentionally putting 14-thousand more kids into poverty-- when we’re trying to change, you know, change what’s going on in this state, lift people out of poverty and reward work.”

But the Earned Income Tax Credit might not be the only way to help the working poor in Michigan.  As I mentioned, a graduated income tax might be one approach.  Donald Grimes is an economist at the University of Michigan.  He says there’s a third way.

“I think what they could have done is they could have increased the exemption amount to exclude essentially income up to poverty. And that’s probably what they could have done in terms of taking care of the seniors as well.”

The current personal exemption is $3600.  Grimes says to avoid forcing the working poor to pay income taxes, that exemption would have to go up.

“So, I’d probably have to go up to, oh, five or six thousand dollars, six thousand dollars a person or something like that, first two people and then three thousand for every dependent. Poverty line is for a family of four would be about $24-thousand. So, you’d want to have something that essentially, at $24-thousand nobody is paying the Michigan income tax.”

So that family of four living on $25,000 a year would pay no or very little in state income taxes.  But they also would not get the $406 refund that they do get under the Earned Income Tax Credit. 

Of course, everyone would get that personal exemption and that would throw off Governor Snyder’s entire budget, leaving the state having to find more cuts to state programs, or adjusting that business tax upward, or expanding the sales tax to services, or some other way of raising revenue for the state.

The Earned Income Tax Credit does not have as many defenders as the other proposed tax increase on individuals, the pension tax.  The working poor don’t have the clout in Lansing that other groups do.

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