Targeting Low-Income Working Families the Wrong Way to Balance Michigan’s Budget

January 10, 2011 at 2:51 pm

Michigan’s new legislative leaders offered a distressing preview last week of how they might fill an estimated $1.8 billion shortfall in the upcoming budget year.  House Speaker Jase Bolger insisted that “We cannot make it more expensive . . . to raise a family in Michigan.”  Nevertheless, he and other legislative leaders from both parties would make it more expensive to raise families that are working their way out of poverty by eliminating or trimming the state’s earned income tax credit (EITC).

The EITC is a tax credit for working families, mostly families with children, with incomes below about $45,000.  Over the years, the EITC has earned bipartisan support at the national and state levels as a way to help working families move up; along with the federal EITC, nearly half of the states have created their own EITCs.  That’s because the policy works:  the federal EITC lifted 6.5 million people out of poverty in 2009, including 3.3 million children.

State EITCs like Michigan’s piggyback on the federal credit and amplify its positive effects, alleviating hardship and stabilizing incomes.  Over 700,000 low- and moderate-income working families and individuals rely on the credit in Michigan, one of the states hardest hit by the recession. State EITCs also put money back into the pockets of the people most likely to spend it and most likely to spend it in their local communities.
Cutting Michigan’s EITC would be especially hard to take if the legislature also approves Governor Rick Snyder’s proposal to reduce business taxes by $1.5 billion.  That would put Michigan alongside New Jersey as a state that raises taxes on working families who can least afford it while simultaneously entertaining far more expensive business tax cuts that increase the budget gap (in this case to $3.3 billion, or about 40 percent of Michigan’s budget).

Last year, New Jersey Governor Chris Christie said the state could no longer afford its EITC and cut it back.  Yet, he and the legislature found hundreds of millions of dollars for more tax breaks to major corporations in the state.

Michigan need not hurt low-wage workers to balance its budget.  Better alternatives exist — like postponing scheduled reductions in the state’s top marginal income tax rate, as the Michigan League for Human Services has proposed, which would save the state $150 million next year.  Michigan could also eliminate corporate tax breaks that have not been proven to create jobs or economic growth.

The challenges facing Michigan and other states are real, but so are those faced by working families.  Sacrificing a program that cuts taxes and supports work for those hardest hit by the recession in the name of a balanced budget is a poor choice.

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More About Erica Williams

Erica Williams

Erica Williams joined the Center in August 2009 as a Policy Analyst with the State Fiscal Project

Full bio | Blog Archive | Research archive at CBPP.org

3 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Nick #
    1

    Wow, thank you for the informative answer. This is quickly becoming one of my favorite sites!

  2. Nick #
    2

    Great post. So, some arguments I hear FOR high end tax breaks are that the companies will come to the state and/or hire more. I don’t live in MI so I don’t know how the tax rates compare to others, but what would you say in response to that?

    It is a shame that they are trying to end the EITC. It seems in times like these, it’s the low to middle class are the ones that get punished for it.

    • 3

      That’s a very common claim about business tax cuts. But cutting business taxes is not likely to enhance the attractiveness of a state to business if those tax cuts (which because of balanced budget requirements will require cuts elsewhere in a state’s budget) impede the state’s ability provide high quality services that ensure businesses have the healthy, educated workforce, the physical infrastructure, and the other factors they need to thrive.

      State and local business taxes are a very small share of business expenses (2.3 percent for the average corporation). So, taxes in and of themselves are unlikely to move corporations from one state to another. Other factors like the quality, supply, and cost of labor, the quality of roads, highways, and transportation systems, public safety, and even quality of life, play a much greater role in their location decisions.

      When states do give tax breaks under the auspices of job creation, they often are paying for something corporations would have done anyway. Businesses are unlikely to relocate unless the state also offers them a host of other favorable factors, like an appropriately-skilled workforce or a growing market for their product. And businesses are unlikely to expand and hire new workers unless they see growing demand for their product.

      The Center’s Senior Fellow Michael Mazerov has more to say about business tax cuts here (http://www.offthechartsblog.org/one-campaign-promise-worth-breaking/).



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