The federal government offers a refundable tax credit program for low-income taxpayers called the earned income tax credit. The tax credit depends on the household’s reportable income and the number of dependent children living in the home. Households can earn larger benefits with higher income, but only up to a point. Benefits then taper off for households that earn income above a certain level.[55]
Half the states offer their own supplements to the federal EITC, though four of them do not make their state benefits refundable.[56] Eligibility for these state EITC credits is identical to federal requirements, and they offer a percentage of the federal credit amount to be used against the state income tax.
Michigan’s program offers qualifying households a credit worth 6 percent of their federal credit.[57] The proposal would increase this to 20 percent after Dec. 31, 2015.[58]
The maximum credit for the federal EITC range from $503 for low-income, childless adults to $6,242 for low-income households with more than two children.[59] If Proposal 1 were approved, the maximum that the state would provide to a household in refundable credits would be $1,248, up from $375.
The average Michigan recipient of the state EITC received a $140 credit in 2013, and the average recipient reported having between one and two children and an income of $17,725.[60] The proposal would mean the average recipient would receive a $482 credit, adjusted for the increases to the federal EITC since 2013.[61] At these rates, the state EITC would fully cover any tax liability that the average recipient household would have and provide a small refund, if the household claimed only standard exemptions with no other credits or exemptions.[*]
This tax credit program is expected to reduce state revenue by $261.1 million in fiscal year 2016.[62]
The proposal also would increase a tax credit available to low-income seniors who pay property taxes. This is expected to reduce state revenue by $300,000 in fiscal year 2016.[63]
[*] A single filer with one child and average EITC income would pay $413 in state income tax liability with no other credits or deductions. Author’s calculations based on “Michigan Earned Income Tax Credit: Tax Year 2013” (Michigan Department of Treasury, Feb. 2015), http://perma.cc/3WVJ-2NKD (accessed March 18, 2015); “2014 Michigan Individual Income Tax Return” (Michigan Department of Treasury, 2014), http://perma.cc/5XG8-T987 (accessed March 19, 2015); “Form 1040: U.S. Individual Income Tax Return” (Internal Revenue Service, 2014), http://perma.cc/73V2-69FW (accessed March 19, 2015).