Earned Income Tax Credit turns financial tightrope into path to success
The Earned Income Tax Credit is one of the most effective anti-poverty, pro-work, pro-business investments we can make as a community. It is a critical proven way to help workers with low to moderate income keep more of their hard-earned wages while boosting local economies.
CRUNCHING NUMBERS and pouring over paperwork—tax returns, no less!—may not sound exciting, but the Volunteer Income Tax Assistance (VITA) program is one of the most important services United Way provides to the community because of its tremendous financial impact that lifts up not only the families helped, but our whole local economy.
Last year, 39 local VITA volunteers clocked 3,073 hours helping Southwest Michigan individuals and families receive $1,723,166 in total refunds—money which then goes back into our community as recipients use these funds to pay for childcare and transportation so they can keep going to work, as well as make necessary home repairs, buy groceries and clothing, or just plain catch up on the bills.
Not all heroes wear capes—some wield calculators, and these volunteer accountants make sure their clients claim the Earned Income Tax Credit (EITC) that is vital to working families making ends meet. The Earned Income Tax Credit is the largest and most successful poverty reduction program in the United States and lifts more children out of poverty than any other program.
What is the EITC?
The Earned Income Tax Credit is a tax credit for working people with lower incomes. It puts money in the pockets of workers who need it most so they can meet basic spending needs. More than 700,000 Michigan households receive the EITC.
Eligible families and individuals can claim both the federal and state Earned Income Tax Credit when filing income taxes. Those who qualify and claim the credit could pay less tax, pay no tax, or even get a tax refund. The average refund for taxpayers claiming the Earned Income Credit is $2,450.
To qualify for the EITC, individuals must have worked and earned income under $57,414. If a federal EITC is granted, the state of Michigan will provide a 6% supplemental EITC when the taxpayer files a state individual income tax return.
For the 2020 tax year, about 713,000 Michigan claimants received the federal EITC, totaling almost $1.8 billion with an average credit amount of $2,467. That same year, about 650,000 families in Michigan also received the state EITC, with an average credit of $135, putting over $90 million back into the local economy.
Bring EITC back up
Michigan is one of 29 other states that provides a state Earned Income Tax Credit tied directly to the requirements of the federal credit. First established in 2006, Michigan’s EITC has ranged from 20% of the federal credit (through most of its history) to 6% today. In 2010, our state legislature cut Michigan’s state EITC by 70 percent, increasing tax bills for working families by up to $300 and hurting their ability to pay for essentials.
There are efforts currently underway in the Michigan legislature to raise the state EITC to provide more help to working families and local businesses. Increasing the Michigan EITC to 30% will put additional funds into the hands of Michiganders with the greatest need—families with children, people of color, and households in rural communities—and support the state economy.
In December 2021, the Michigan Senate Finance Committee held a hearing on Senate Bill 417, legislation sponsored by Republican State Senator Wayne Schmidt to increase the Michigan EITC to 30% of the federal credit. Under this legislation, the maximum state EITC would be increased from $32.58 to $162.90 for workers without qualifying children and raise the credit from $150 to $750 for the average Michigan family. Raising the state EITC to 30% of the federal credit would raise the number pumped back into the Michigan economy to $460 million annually. A variety of groups spoke or submitted written testimony in support of Sen. Schmidt’s bill, including the Michigan League for Public Policy, the Small Business Association of Michigan, and the Michigan Restaurant and Lodging Association.
The EITC has a proven track record of pulling people into the workforce. Especially these days, as Michigan employers struggle to find workers, the EITC increases the after-tax financial benefit of work. This return-to-work incentive will benefit all employers, but especially restaurants, retailers, and small manufacturers. That’s why 12 local Chambers of Commerce and the Michigan Manufacturing Association also support increasing the EITC.
Bipartisan support
In her State of the State address in January, Governor Gretchen Whitmer indicated her support for increasing the Michigan EITC, opening bipartisan negotiations to expand it. Gov. Whitmer’s fiscal year 2023 budget recommendation takes advantage of the opportunity Michigan has to cut taxes for hardworking families by tripling the Michigan EITC to pull 22,000 Michiganders out of working poverty and deliver 730,000 households an average combined tax refund of $3,000 beginning with tax year 2022.
The EITC has a strong history of bipartisan support. The federal EITC was signed into law in 1975 by President Gerald R. Ford, a Michigan Republican, and passed with a Democratic majority in Congress. President Ronald Reagan signed a major expansion of the credit in 1986. And the Michigan state EITC was created in 2006 with a Republican-led Legislature and signed into law by Democratic Governor Jennifer Granholm. Now there is another opportunity for bipartisan agreement on the state EITC.
“We can all agree that after a tough few years, extra money in your pocket will make a difference. The federal and state Earned Income Tax Credits make a difference for Michigan’s families, whether it’s helping them put food on the table or buy new school supplies for their kids,” said Whitmer this past March. “It'll get more money back to Michiganders at a time they can really use it.”
“It’s been a challenging year for many residents and the extra income this tax credit provides can be really helpful to working families,” said State Treasurer Rachael Eubanks. “Every refund helps Michigan families care for their children and meet living expenses.”
“The Earned Income Tax Credit is the largest and most successful poverty reduction program in the U.S. and lifts more children out of poverty than any other program.”
CLICK HERE to tell our elected officials to increase the state Earned Income Tax Credit to 30% of the federal credit, up from the current level of 6%.
UWSM advocates for increasing the state Earned Income Tax Credit
Our 2022 advocacy agenda specifically focuses on youth, young adults, and those from marginalized communities. UWSM recognizes that the strength and vitality of communities is tied to just and equitable access to resources and opportunities. We support actively dismantling barriers to resources and opportunities in education and economic mobility.
One of United Way’s 2022 advocacy agenda items is: Strengthen the Earned Income Tax Credit so that working families with lower incomes can meet basic spending needs and put money back into local communities.
How can we accomplish this?
Increase the state Earned Income Tax Credit to 30% of the federal credit, up from the current level of 6%.
Why is this important in Southwest Michigan?
Workforce challenges are top-of-mind for the business community, and these challenges are predicted to continue for at least another decade. The Earned Income Tax Credit exemplifies a pro-work philosophy and provides financial incentive to increase participation in the workforce.
37% of southwest Michigan households are working hard, but still struggling to afford necessities. Offsetting some tax responsibility through an expansion of the EITC will help boost earnings for working families, providing them an opportunity to step up and out of poverty toward meaningful financial security.
Michigan’s credit, at 6% of the federal credit, is one of the weakest state credits nationwide.
EITC is more than a quick fix—In addition to helping pull families, including children, above poverty, it has lasting positive impacts on the lives of children. Research shows that it improves infant and maternal health, school success, college enrollment, and increased work earnings as adults.
“In tax year 2020, the state EITC not only helped families in need, but it also put over $90 million back into Michigan’s economy. Raising the state EITC to 30% of the federal credit would raise the number pumped back into the Michigan economy to $460 million annually.”
United Way of Southwest Michigan provides free tax preparation for low- to moderate-income working families in Berrien, Cass, and Van Buren Counties. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who make $57,000 or less and need assistance in preparing their own tax returns. One of the focal points of the VITA program is raising taxpayer awareness and receipt of the Earned Income Tax Credit (EITC).
