Michigan no longer among the harshest

April 29, 2010

Peter Ruark

Thanks to the state Earned Income Tax Credit, Michigan has gone from being one of the harshest states when it comes to taxing its poor to one of the more moderate states.

The Center on Budget and Policy Priorities has released a state-to-state comparison of the state income tax threshold, the minimum level of household income at which a family or individual must pay income tax. Families with incomes below that level do not have to pay state income tax. 

So how has Michigan done? Well, in 1990 a two-parent family of four could have an income as low as 60 percent of the federal poverty line and still pay state income tax, and by 1995, the tax threshold had dropped to 55 percent of the poverty line. However, for most years from 2000 through 2007, the tax threshold for the same family was between 70 percent and 73 percent. 

Then, in 2008, the Michigan Earned Income Tax Credit went into effect, which allowed filers to claim 10 percent of the amount of their federal earned income credit amount that year as a state credit. This caused Michigan’s state income tax threshold to jump to 108 percent. Because the threshold was now at more than 100 percent of the poverty line, this meant that Michigan’s working poor families no longer had to pay state income tax.

In 2009, the state Earned Income Tax Credit went from 10 percent to 20 percent of the federal credit, bringing Michigan’s state income tax threshold to 121 percent of the poverty line. Families who three years ago would have had to pay income tax each year are now getting money back as a refundable tax credit. A single parent with two children who earns minimum wage gets a Michigan earned income credit of $545 this year, and a two-parent family of four with similar income gets $701.

So how does Michigan compare to other states in terms of income tax fairness? A few years ago, among the 42 states with income tax, Michigan was in the top five worst (lowest) tax thresholds. It now ranks around 30-32 in most comparisons (minimum wage earners, household income at poverty line, etc.), with 42 being the best. So thanks to the legislators and governor who enacted the state earned income credit, Michigan’s working poor families can look forward to tax season rather than dreading it.

— Peter Ruark


Working poor tax cuts should be part of debate

February 22, 2010

Peter Ruark

Congress will be debating soon whether to extend the controversial tax cut packages passed in 2001 and 2003.

These tax cuts are widely blamed for the deficit that President Obama inherited when he took office last year and are seen as one of the principal causes of the current deficit. Equally controversial to the hole in the federal budget they created was the fact that most of the tax cuts were aimed at affluent Americans.

One provision in this package, however, has benefited many families who are lower on the income scale: the provision making the child tax credit partially refundable to families making over $10,000 (meaning that these families can receive a partial credit even if the credit amount exceeds the amount they owe in tax).

The child tax credit, which gives families a $1,000 credit per child up to two children and a partial credit for additional children, has seen two other improvements since then. The first improvement was in 2008, when the income eligibility threshold was lowered to $8,500 for that tax year. Then, in 2009, the Recovery Act lowered the threshold to $3,000, making the credit available to many very poor families who would have otherwise been ineligible.

As a result of the 2009 change, a family with two children is now able to receive the full credit when its earnings reach $16,333 (as opposed to $21,993 in 2008 and $23,333 in 2001).

A report by the Center on Budget and Policy Priorities estimates that families of 584,000 children in Michigan would lose all or part of their child tax credit if Congress renews the Bush tax cuts without extending the 2001 and 2009 child tax credit improvements. Nationally, families with incomes above $10,000 would bear 80 percent of the tax credit losses.

It would be unfair to extend tax credits for the wealthy without also extending one that benefits the poor. Not only that, it would be irrational in light of the current economic situation. Like the earned income tax credit, the child tax credit given to low-income working families tends to get spent in local businesses and thus act as a stimulus to local economies. The child tax credit expansion was included in the Recovery Act because it is one of the fastest ways to get additional money flowing through communities, helping to save and create jobs.  

Fortunately, the 2001 and 2009 improvements to the child tax credit are in the budget set out by President Obama and in legislation introduced by Senate Finance Committee chairman Max Baucus. However, as we have painfully seen many times in recent years, the sausage-making that goes on as a bill winds its way through committees, debates, floor votes, and conferencing can often result in certain elements of the bill getting dropped.

We need to make sure Congress does not short-change low-income workers as it passes its budgets for the upcoming fiscal year, and the Michigan League for Human Services will keep you informed if any mischief occurs with this credit.

— Peter Ruark

New year brings good news for working poor

January 4, 2010

Welcome to the League’s new blog, Factually Speaking! We hope to keep you informed and listen to your ideas on issues affecting low-income families in Michigan.

The start of the new year brings good news for hundreds of thousands of low- and moderate-income working families as the scheduled increase in Michigan’s Earned Income Tax Credit (EITC) takes effect.

Despite efforts to freeze the credit at the current level of 10 percent of the federal EITC, or reduce the size of the increase, hard-working families can file their 2009 tax returns knowing that the credit they will receive will double over last year’s amount.

In tax year 2008—the first year the credit was in effect—approximately 702,000 filers received the credit. The average credit for a single mom with two children working full time at the minimum wage was $478.

Imagine the impact this year when the credit increases to 20 percent of the federal credit! Most studies show that EITC refunds are spent in local communities, often for large expenditures—the car or washer repair, the first month’s rent and security deposit for a better apartment in a safer neighborhood, and other purchases that have been put off.

Thanks to all who told policymakers that keeping the state EITC on track was critical to helping families on the margin.

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