2012-04-26 / News

Michigan to join states taxing the working poor further into poverty for year 2012

Michigan is poised to join the small list of states that levy an income tax on working families living in poverty in 2012 thanks to tax policy changes made last year, according to an annual report on state income tax trends.

The Impact of State Income Taxes on Low-Income Families in 2011 found that Michigan was one of the better states when it comes to tax policies on the working poor. But passage of a law that cut taxes for corporations while raising them for the working poor and seniors means that Michigan will soon impose income taxes on those living slightly below the poverty line.

By restoring the state’s Earned Income Tax Credit, cut from 20 percent of the federal credit to 6 percent for tax year 2012, Michigan could avoid joining the list and help these families work their way toward the middle-class, the report concludes.

“Unless we restore the EITC, Michigan will soon tax the working poor deeper into poverty, instead of helping families climb into the middle class,” said Karen Holcomb-Merrill, policy director of the Michigan League for Human Services. “Reducing income taxes for the working poor both encourages work and reduces poverty, while setting families, and our state economy, on the path toward a better future.”

The report examined state income taxes in 2011, prior to the new tax law championed by Governor Rick Snyder that cut the Michigan EITC and the Homestead Property Tax Credit. Michigan was one of three states to recently scale back its EITC. The overall change will mean that corporate income taxes will drop by 83 percent while income taxes will increase by 23 percent.

In 2011, 15 states taxed families of four living below the national poverty line ($23,018 per year) according to the report. Michigan was one of 16 states that not only avoided taxes on working poor families but also offered tax credits that produced refunds to families of four living at the poverty line. It is one of 18 states that offered refunds to families of three at the poverty line.

The report found that a two-parent Michigan family living at the poverty line will see their tax bill jump by $678 in the 2012 tax year. In 2011, a two-parent family of four in Michigan only faced income taxes if their earnings were at least 34 percent above the poverty line. But, that threshold will fall slightly below the poverty line under the new law.

The findings were released by the Center on Budget and Policy Priorities, a nonpartisan policy research organization based in Washington, D.C.

Taxing the incomes of workingpoor families is contrary to years of bipartisan efforts at both the federal and state levels to help such families work their way into the middle class, the Center’s report shows. States have used a variety of tax exemptions, deductions, and credits, particularly state Earned Income Tax Credits, to reduce or eliminate the income tax obligations of the working-poor.

State Earned Income Tax Credits, modeled after the highly successful federal version, reward work by allowing struggling families to keep more of what they earn. For two decades, an increasing number of states adopted such tax credits and deductions, but progress has stalled in recent years.

“Exempting working-poor families from state income taxes is good for Michigan’s economic future,” said Phil Oliff, co-author of the report and policy analyst at the Center on Budget and Policy Priorities. “Raising the income of poor families boosts children’s chances of academic success and their earning potential in adulthood.”

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