Taxing working families into poverty

Added November 15th, 2011 by Judy Putnam | Email This Entry Email This Entry
Judy Putnam

A new report out today says Michigan is above average in taxing the working poor in Tax Year 2010. That’s the good news.

Now for the bad news. Michigan’s above-average status will be short-lived because of a dramatic reduction in the Michigan Earned Income Tax Credit in 2012. The reduction is part of Gov. Rick Snyder’s restructuring of the state tax system approved by lawmakers this spring. The change will mean Michigan will once again tax families living below the poverty level  starting in 2012.

Michigan was cited as one of the back-sliding states in the report, The Impact of State Income Taxes on Low-Income Families in 2010, by the Washington D.C.-based Center on Budget and Policy Priorities. The report found that only 15 states tax a working poor family of four living at or below the poverty line. Michigan is not in that group of 15 states but will likely join it as new tax changes kick in.

In 2010, Michigan taxed a family of four only when family income reached 136 percent of poverty – about $30,300.  Twenty-seven other states taxed families living deeper in poverty than Michigan.  And the refundable state EITC helped make Michigan among the best states for supporting the working poor – refunding $679 to a  two-parent family of four earning poverty level wages. Only six states offered higher refunds than Michigan out of the 42 states with income taxes.

The new Michigan EITC changes, however, will reverse the gains made in Michigan. The state EITC, now at 20 percent of the federal EITC, will drop to just 6 percent for Tax Year 2012. That means a family of four living just below poverty will pay income taxes.

Michigan was once among the 10 worst states for taxing people living in poverty. It improved with the Michigan Earned Income Tax Credit, which began in Tax Year 2008. Now, the Great Lakes state is slated to fall again as the reduced EITC takes effect.

“Increasing taxes on the working poor increases poverty and reduces the after-tax incomes of working families already hit hard by the recession,’’  the report concludes.

For many, those are just words on paper. But when taxes are due in April 2013, the reality will hit for thousands of Michigan families scraping by on poverty-level wages and literally being taxed into poverty.

 — Judy Putnam

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