News Story

State Income Tax Also Serves as Stealth Welfare Program

In 2012, the state of Michigan distributed $2.96 billion in assistance to lower income families through what is probably the government's best known welfare program — food stamps.

However, the public is less aware of two small state welfare programs that distribute cash subsidies though what may seem an unlikely vehicle, the state income tax code. These are called the Earned Income Tax Credit (EITC) and the Homestead Property Tax Credit (HPTC). According to the Michigan Department of Treasury, in 2012 the two programs redistributed a combined $245 million to individuals with very low wage income and families with limited "household resources."

The Homestead Property Tax Credit allows a low-income household to get a subsidy that in concept is linked to the property tax it pays on its house or apartment. It is not limited to homeowners. People who rent may also qualify, on the grounds that a portion of rent payments cover the property tax of the landlord. In the case of renters or homeowners, the credit is available only to people who meet certain income guidelines.

The Earned Income Tax Credit is a subsidy that goes to low-income families with very low levels of wage income. It is intended as a supplement to increase the value of working a part-time or minimum-wage type job.

The money for both programs comes from state taxpayers. Nearly one-third of Michigan residents who filed a state income tax return in 2012 reported income of less than $16,000. For many at this income level the only reason to file a tax return is to collect payments from one or both programs. Overall, net payouts of $245 million were distributed as a result of 1.5 million tax income tax returns that reported incomes of $0 to $16,000 in 2012.

“Higher or lower welfare spending is an ongoing debate, and fair enough,” said Jack McHugh, the legislative analyst for the Mackinac Center for Public Policy, in an email. “But in both corporate welfare and regular welfare, using the tax code to distribute handouts makes the practice look sneaky, as if the politicians are trying to hide what they’re doing from voters. This murkiness is exploited for political purposes, too, as in the rhetorical mischief surrounding an EITC spending hike proposed by Proposal 1 last spring. Specifically, all the dodgy analyses and assertions characterizing this as ‘a tax cut’ rather than an increase in welfare spending.”

“People can disagree about the value of this and other income redistribution program, but everyone should favor forthright and transparent accounting for them,” McHugh said.

Gilda Jacobs, the director of the Michigan League for Public Policy, said the EITC was an offset put in place because low-income people pay a higher percentage of their income in sales tax and property tax. She said the Homestead Property Tax Credit helps serve low- to middle-income senior citizens.

“It (HPTC) helps alleviate the tax burden for seniors who are struggling to make ends meet every month,” Jacobs said.

Antony Davies, an associate professor of economics at Duquesne University, said the federal income tax code is also a form of income redistribution.

Davies said in an email that on average 60 percent of households receive more back from the federal government than they pay in.

“That is, on average, the richest 40 percent of households are the only ones paying in to federal coffers,” Davies said. “To make matters worse, not only do we mix revenue generation with redistribution, but we also mix redistribution with welfare. The result is a tax code that is inefficient at generating revenue and a welfare system that is inefficient in helping the poor.”

The Michigan EITC is based on the federal version, and essentially kicks in another 6 percent to the amount of the federal EITC payments collected by beneficiaries.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.