In Michigan, move to restore tax credit likely to languish

5/18/2012

LANSING, Mich. -- If you had to sum up the Republican Party's creed in a sentence, it might be: Raising taxes is a bad idea, no matter what. The GOP's rising Tea Party faction's name began as an acronym: Taxed Enough Already.

So how do you suppose Republicans would react if someone proposed slapping a massive tax increase on the working poor, one that was certain to hurt small businesses as well?

In Michigan, the answer is clear, even if it's not what logic might lead you to expect. Hitting the working poor with a huge tax increase is exactly what the GOP-led state government did last year. The results are beginning to show.

Last year, the heavily Republican legislature reduced the state's earned income tax credit, usually known as the EITC, from 20 percent of the federal credit to just 6 percent. That has meant an effective tax increase of an estimated $244 million on Michigan's poorest working families.

Gilda Jacobs is president of the nonpartisan Michigan League for Human Services, which calculated that figure. She said: "That's money that would otherwise have gone to small businesses across the state that serve the needs of working families."

Particularly hardest hit, she said, are people in Michigan's inner cities and rural communities. When the working poor get a little extra money, they don't sock it away in banks in the Cayman Islands. They tend to spend it almost immediately in the local economy. That produces a pro-growth multiplier effect.

The generally conservative Anderson Economic Group calculated that every dollar returned to the working poor generates $1.67 worth of economic activity. That not only helps keep the working poor from falling into poverty, it helps the small businesses that serve them.

Ms. Jacobs, a former Democratic state senator from the Detroit suburbs, agreed that impoverished Detroit is hard hit because the working poor now keep less of their income.

But leaders of the League for Human Services think the biggest impact might be felt upstate, where there is not a lot of affluence outside resort towns such as Petoskey and Harbor Springs.

"Many lawmakers don't realize the impact the EITC has on rural regions of our state, particularly in northern Michigan, which have high levels of poverty," Ms. Jacobs said.

She fears that the cut to the tax credit "may well put out of business some small businesses such as independent grocers, small auto repair shops, and secondhand stores that cater to low-income working families in rural communities."

The situation could have been worse. Last year, there was talk about doing away with the EITC. Gov. Rick Snyder came into office saying everyone should be treated the same under the state tax code. He vowed to do away with special deals, such as massive tax breaks given to the film industry.

Despite deep cuts, the EITC survived. Democrats who fought to save it last year often irritated Republicans by quoting a famous politician who drastically expanded the federal EITC while he was president.

"The earned income tax credit is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress," said Ronald Reagan.

Three months ago, Democratic state Rep. Phil Cavanagh introduced a bill that would fully restore the earned income tax credit, arguing that it was clear how much it is needed.

But the measure appears to have no chance. Democrats are heavily outnumbered in the Legislature, and major bills they introduce tend to be ignored.

The governor and his GOP allies seem to feel that the key to regaining prosperity in Michigan lies almost entirely in tax breaks designed to lure business to the state.

That doesn't make sense to Ms. Jacobs, who lives in relatively affluent Huntington Woods. Asked whether cutting the amount of disposable income the working poor get to keep was apt to topple more families into poverty, she said: "Absolutely."

Of the tax-credit program, she said: "This has as much of an economic impact as there is in giving tax credits to business. Low-income families pay a larger share of their income already in sales and property taxes than [the] wealthy."

Not only does it make economic sense to let them keep more of their income, she said, there is also a question of fairness.

There's no sign, however, that the Republican majority agrees.

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How much can you make and still qualify for the Michigan earned income tax credit? According to a state Web site, for tax year 2011, the maximum for families with one child was $36,051. That rises, depending on circumstances, to a maximum of $49,077 for married workers who file jointly and have at least three children.

Jack Lessenberry, a member of the journalism faculty at Wayne State University in Detroit and The Blade's ombudsman, writes on issues and people in Michigan.

Contact him at: omblade@aol.com