Now is the time to make fundamental changes in the state’s playbook to increase the economic well-being of all Michiganders. What we have been doing for decades has left too many households struggling, even when the economy by traditional measures was booming, as evidenced by nearly four in 10 Michigan households unable to pay for basic necessities in our robust 2019 economy.
It is clear that mid-course adjustments in what we have been doing is not the path to achieving a rising income for all. Rather, we should identify the state policy levers that can have the highest impact on ending Michigan’s two-tier economy, and then go big in pivoting to a new approach to building a market economy that as it grows benefits all.
Let’s start with greatly expanding the Earned Income Tax Credit. For example, expanding the state credit from 6% to 60% of the federal credit would increase the average state credit from $150 to $1,500.
The EITC is pro work and an incentive to go back to work. Nearly six in 10 Michigan jobs pay less than what is required for a family of three to be middle class ($47,000). The pandemic made clear that these low-wage workers live paycheck to paycheck not because they are irresponsibly buying “unnecessary” luxuries, but because they are in low-wage jobs that leave them struggling to pay for the necessities. The reality is that most of those struggling economically, in good times and bad, are hard-working Michiganders who like us get up every day and work hard to earn a living.
What these lower-wage workers need most is income, not programs.
In an op-ed for USA Today entitled “To cut poverty and solve the labor shortage, enhance the Earned Income Tax Credit,” Kevin Seifert, vice president of the American Idea Foundation, a nonprofit headed by former Speaker of the House Paul Ryan, writes:
“Since 1975, the Earned Income Tax Credit has proven to be one of the federal government’s most effective poverty-fighting programs and enhancing the credit is one of the best ways Congress can ensure a strong, bottom-up recovery from the pandemic. A common-sense expansion of the EITC is precisely the medicine the U.S. economy needs to return to full health.
“… For millions of Americans with lower incomes, because of the Earned Income Tax Credit, the more they earn, the larger the benefit they receive. The EITC’s intentional design not only helps employers and their employees but it directly aids families and their children as well. The benefit helps society’s most vulnerable and because it is tied to earnings, it reinforces the values that come with a steady paycheck.”
Seifert is right when he writes that the EITC benefits workers, their families and employers. Employers benefit from the incentives to work more, including incentivizing people to return to work, and from the increased demand for local goods and services.
The federal EITC was signed into law by President Gerald Ford in 1975.
To encourage greater participation in the workforce, the EITC is based on earned income, such as salaries and wages. Workers receive the credit beginning with their first dollar of earned income; the amount of the credit rises with earned income until it reaches a maximum level and then begins to phase out at higher income levels. The EITC is “refundable,” which means that if it exceeds a low-wage worker’s income tax liability, the IRS will refund the balance.
Research indicates that families mostly use the EITC to pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.
Michigan enacted a state EITC in 2006 at 20% of the federal credit. In 2011, the Michigan EITC was reduced to 6% of the federal credit. In 2019, 738,000 Michigan households received the state EITC with an average benefit of $150, for a total cost of $111 million.
In Kent County, 44,000 households (14%) received the EITC in 2019 at an average federal credit of $2,367 and average state credit of $142. The combined state and federal credits increased recipients’ purchasing power by $111 million. Raising the state tax credit to a 60% match would add another $63 million in purchasing power to the families of hard-working Kent County residents.
Thirty-plus states, as well as Washington, D.C., offer state EITCs. Of the states with refundable credits and a match for the federal credit, Michigan has the fourth-lowest match. The highest match is 85% in California but only for very low-income earners. Of the states with a match for all federal EITC-eligible households, Maryland currently has the highest match at 45% and D.C. has the highest match for childless households at 100%.
If Michigan is serious about having a market economy that as it grows benefits all, now is the time for Michigan to move from the bottom to the top of states’ EITC.
Lou Glazer is president of Michigan Future Inc.