There’s no doubt that Michigan needs to find additional funds to repair its rapidly deteriorating transportation network. But the package of bills just approved by the Michigan House of Representatives represent some of the worst ideas for doing so.
The most problematic change would repeal the state’s Earned Income Tax Credit (EITC). The EITC is a vital pro-work and anti-poverty tax credit that benefits roughly 800,000 Michigan families every year. Just four years ago, Michigan lawmakers voted to scale back the state’s EITC by 70 percent to help fund large business tax cuts. Rather than revisiting whether such dramatic tax cuts were prudent, the House wants to double down and repeal the modest EITC that remains.
Judging by the statements being made by some lawmakers, this decision seems to be based in part on a fundamental misunderstanding of how Michigan’s tax system works. State Rep. Aric Nesbitt, for example, justified his vote by saying that EITC repeal “helps ensure a flat and fair system.” In reality, repealing the EITC would only exacerbate the unfairness of a tax system already tilted against low- and moderate-income taxpayers.
Under current law, Michigan’s wealthiest residents pay 5.1 percent of their income in state and local taxes while the state’s poorest residents pay a significantly higher 9.2 percent rate. Repealing the EITC would have no impact on the taxes paid by the state’s more affluent taxpayers, but an ITEP analysis showed that it would raise the rate paid by the state’s low-income residents to 9.7 percent. The result would be an even more steeply regressive tax system, and one even further from the “flat” ideal that Rep. Nesbitt says he supports.
While EITC repeal is the most troubling aspect of the House package, the lion’s share (more than $900 million out of a $1.1 billion package) of the road funding would come from simply diverting money away from other vital services such as health care, education, corrections, and economic development. This reshuffling of funds toward roads and bridges is nothing more than a Band-Aid tactic—and one that we’ve seen create real budgetary problems in states such as Oklahoma and Utah.
The one bright spot in this plan would raise the diesel tax by four cents and would index both gasoline and diesel tax rates to inflation. If these changes are enacted into law, Michigan would become the 17th state to raise or reform its fuel taxes since 2013. Such reforms are vital to ensuring the long-run sustainability of gas taxes—the single most important source of transportation funding available to Michigan lawmakers.
But despite their merits, these incremental gas tax reforms will hardly be worth celebrating if they’re accompanied by an elimination of the EITC and cuts to non-transportation areas of public investment. Hopefully the Michigan Senate will be able to come up with some better ideas as it crafts its own transportation funding package.