News Release: Michigan Earned Income Tax Credit to Benefit Over 600,000 Working Families

(LANSING)—Michigan’s recently enacted Earned Income Tax Credit (MEITC) will stand to benefit over 600,000 low-income working families this tax year despite the gloomy outlook of the state’s economy, the Michigan Catholic Conference (MCC) announced today at a press conference at the State Capitol. The findings were discussed in detail by Patrick Anderson of Anderson Economic Group (AEG), which was commissioned by the Catholic Conference to update its 2002 report A Hand Up for Michigan Workers: Creating a State Earned Income Tax Credit. The revised report details the combined effect of numerous federal, state, and local taxes on the working poor, explains how an MEITC will help working families, quantifies the likely state cost of the MEITC, and evaluates the effect of the new EITC on the state’s working poor and the state’s budget.

“Some in the media, and some policy-makers have suggested that the MEITC should be halted before it takes effect as a means of cutting Michigan’s budget. Our message today is that the state cannot chip away at the budget deficit on the backs of Michigan’s working poor, especially at a time when more Michigan residents are living in poverty than when the initial AEG report was released six years ago. Such action would amount to nothing more than a tax increase on those working families who are struggling to climb above the poverty line in Michigan,” said MCC Vice President for Public Policy Paul A. Long.

In September 2006 a Michigan earned income tax credit was enacted with immediate effect. The legislation allows taxpayers who qualify for the federal Earned Income Tax Credit, beginning after December 31, 2007, to claim a state credit worth 10 percent of the federal credit. Beginning December 31, 2008 and beyond, the taxpayer will be eligible to claim an additional 10 percent of the federal credit, making the final state Earned Income Tax Credit worth a total of 20 percent of the federal credit. The legislation passed the Michigan Senate 38-0 and the House of Representatives 103-3 before being signed into law.

According to Patrick Anderson, Principal and CEO of the Anderson Economic Group: “In a troubled economy, the EITC is especially important for entry-level workers trying to climb the first steps of the economic ladder as it provides tax relief and cash assistance for struggling working families.”

Dispelling public comments from those who oppose the MEITC on the grounds that the new policy would cost the state up to $200 million per year, the AEG report indicates that in fiscal year 2009, the first year the state will pay the refundable tax credit, the net cost of the policy will be $40 million, or 0.2 percent of state revenue from state sources in 2006. Over the next 5 years the net cost of the tax credit will grow slowly as more earners participate in the program. By 2013, the AEG report indicates the net cost to the state for the MEITC will be between $100 and $129 million. AEG also found that the likely effective tax rate on the first $1,000 of wages without the EITC is 23% for a married couple with one child. A Michigan EITC, coupled with the federal EITC, provides tax relief for low-income working families and lowers the effective tax rate on the first $1,000 of wages to -18%.

The AEG report provides the best estimate of the net cost of the MEITC to the state and accounts for changes in the number of filers, participation rates, average credit amounts, and work behavior while other estimates do not. Says Anderson: “Our estimate of the net cost of the Michigan EITC shows that the State will recover over half of the cost for credits through higher tax collections and lower social assistance payments due to the new wages earned by Michigan residents who enter the workforce due to the EITC.”

Also speaking on behalf of the state’s working poor at today’s press conference was Michigan League for Human Services President and CEO Ann Marston, who confirmed that as more people in Michigan fall into poverty despite holding down jobs, it’s important to have the tax credit to reward work and make sure basic needs are met. According to Marston, “The Michigan Earned Income Tax Credit will make a real difference in the lives of hard-working families who have, until now, been left out of numerous tax breaks given to corporations and higher-income workers. It’s a matter of fairness. This tax credit must go forward. It would be unconscionable to pause or repeal it as Michigan families struggle to make ends meet.’’

Michigan Catholic Conference is the official public policy voice of the Catholic Church in this state.

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