States Scale Back Tax Credits for Low-income Workers While Cutting Business Taxes

Study: Michigan Among States Raising Poor's Taxes

November 15, 2011

AP - Michigan is among just a handful of states raising taxes on low-income working families while cutting taxes for other groups, the Center for Budget and Policy Priorities said in a report released Tuesday.

The Washington-based group notes that Michigan, New Jersey and Wisconsin all have scaled back tax credits for low-income workers in recent years while cutting business taxes. In Michigan's case, low-income families will see their tax breaks shrink starting next year by about $260 million annually while businesses will get a $1.1 billion tax break starting in January and a $1.7 billion tax break the year after.

Michigan Gov. Rick Snyder originally wanted to eliminate the state Earned Income Tax Credit, but agreed to reduce it from 20 percent of the federal credit to 6 percent for tax year 2012. He said earlier this year that the state needed to make cuts to balance the budget and noted no cuts were being made in Medicaid programs providing health care to low-income working families. He also has said the business tax cuts will create employment opportunities.

"More and better jobs are at the heart of the governor's plan to improve and strengthen our economy so ALL can prosper and benefit," Sara Wurfel, a spokeswoman for the first-year Republican governor, said in an emailed response to the report.

Wurfel said Snyder finds it unacceptable that Michigan's families "are among the poorest in the nation."

"His overall plan aims to help address and reverse that trend. He's also worked hard to ensure essential and solid safety net services that lower income individuals rely on, like protecting Medicaid access and services," she said.

The Michigan League for Human Services, which opposed shrinking the tax credit, said the change is bad policy.

Five years ago, Michigan was one of just five states that taxed a working family of four making below $14,000, about 71 percent of the federal poverty level, one of the harshest levels of taxation on the poor in the country.

That changed when lawmakers passed the state tax credit, which took effect in 2008. Last year, Michigan taxed a family of four only when its income reached 136 percent of the poverty level — about $30,300, according to the center's report.

"Michigan had made a lot of progress from the days when we used to literally tax working families into poverty," the league's policy director, Karen Holcomb-Merrill, said in a statement. "Unfortunately, we're moving once again moving in the wrong direction on this issue."

Families qualifying for the Earned Income Tax Credit have been getting about $430 annually from the credit. That amount will drop to $130 to $140 in the next tax year. Meanwhile, two-thirds of Michigan businesses next year will be exempt from paying corporate income taxes under the new business tax breaks.

"EITC cuts helped offset ... the revenue loss from those tax cuts," the center said in its report. "Instead of undermining efforts to reduce the tax liabilities of poor families, states should preserve the progress they have made and build upon it when their budget outlook improves."

Wurfel said the tax changes were part of an effort to make the system "simple, fair and efficient."

"It was also about ending exorbitant business tax credits that were jeopardizing our future and ensuring a level playing field for all industries and sectors," she said. "It was about creating a structurally balanced budget that could be a building block for the future."