Last Thursday, as an economic consulting firm released a report finding that the Michigan Earned Income Tax Credit (EITC) "generates positive benefits for residents in Michigan," sources close to the state's governor revealed that she had decided to cut that very tax credit.
The federal EITC was created in 1975 and expanded several times since then, including in 1986 by President Reagan, who called it the “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.” Over the years, many states have created their own EITCs to supplement the federal one, and a great deal of research shows that these state EITCs are a good investment.
Governor Jennifer Granholm's proposal to balance the state's budget includes a reduction in the state's EITC from 20 to 15 percent of the federal credit. This proposal can't even be described as penny wise and pound foolish, because it's going to cause unnecessary pain immediately. The new report from Anderson Economic Group finds that "the Michigan EITC reduces poverty and increases income by an average of 3% for those who receive the tax credit...the EITC generates positive economic benefits for residents in Michigan." The report goes on to say that if monies used to fund the state EITC were used elsewhere, the funds "would not be distributed so widely in the state or used as productively as putting money into the hands of families that then spend this money in their communities."
The EITC cut is only one component of the Governor's proposal. She would also solve the state's budget shortfall by expanding the sales tax base to entertainment services including tickets to concerts and athletic events, increasing the state's cigarette tax, and levying a penny sales tax on the purchase of bottled water. Expanding the state's sales tax to include more services is a smart plan, but cutting the EITC at a time when many Michigan families are struggling is a terrible one.