Michigan rethinks its tax code

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Kai Ryssdal: That debate they're having in Washington? About cutting spending or raising taxes to trim the deficit? Eliminating entitlements or closing loopholes?

That's old news in the states. Legislatures and governors have been going down that road for a couple of years now. It's how lawmakers in Michigan spent this past week. The education budget there is going to be cut. Community health programs and prison funding, too. And Republican Governor Rick Snyder also wants to fundamentally remake the state's tax code.

Michigan Radio's Jennifer Guerra reports.


Jennifer Guerra: Michigan was losing jobs even before the recession hit. The state's manufacturing base has been steadily eroding for decades, and other parts of Michigan's economy weren't creating enough jobs to make up for it.

Governor Rick Snyder knows where he'd put most of the blame.

Rick Snyder: We've had a tax system in our state that's been broken for a long time.

Snyder says Michigan's tax code takes too big a bite out of small businesses. The thinking goes if they pay less in taxes, they'll have more money to expand and create jobs.

Jerry Grub owns Wee Discover, a day-care center in Waterford, Mich.

Jerry Grub: I pay taxes on the business, and then all of that income and expenses, etc. flows through to my personal income tax, and I pay tax on that again.

Governor Snyder wants to throw out the state's current business tax and replace it with a 6 percent tax that would largely fall to corporations. Most small businesses -- like Wee Discover -- wouldn't have to pay it.

Grub: If the governor's tax proposal went through the way it is, I'd be saving 8 or 9 percent of the tax that I pay currently.

And while he probably won't hire more people with that money, Grub says he will give his employees a much-needed raise.

Now, the tax cuts for small business would cost the state government about $1.8 billion in revenue. To help make that up, Snyder wants to cut the state's Earned Income Tax Credit, or EITC, for the working poor. Launched in 2006, the tax credit was meant to supplement the federal EITC given to people who have jobs but who earn less than a certain amount. Last year, the threshold was about $45,000 for a family of four.

Charley Ballard: The elimination of the earned income tax credit will push some low income working families in Michigan into poverty.

Charley Ballard is an economist at Michigan State University. He points out that everyone from Presidents Ronald Reagan to Bill Clinton have been in favor of the earned income tax credit. Snyder's plan would eliminate the state portion of the tax credit, which is 20 percent of the federal EITC. In its place, Snyder would give eligible families $25 a year per child.

Tiffany Blackman: We actually have gotten the earned income tax credit for the last four years.

Twenty-eight-year-old Tiffany Blackman makes $20,000 a year as a coordinator at a Michigan food bank. Her husband Rodrico has been unemployed for a year and they have three kids. Tiffany says after they pay their bills each month, the family has about $60 left over. So the money they get from the state and federal government helps.

Blackman: We use it to kind of keep us afloat throughout the year. Like our car repairs, anything with our children's school clothes, all of that is essentially coming back from any tax refund that we get back.

Last year, they got about $5,000 from the federal EITC and about $900 from the state.

Blackman: And over the last four years which we've been getting this, I really feel like there's hope in the boat out of poverty.

Don Grimes is an economist at the University of Michigan. He says when the state first started to offer the EITC, Michigan was relatively wealthy and could afford it.

Don Grimes: Now we're a relatively poor state. So you have to wonder at what point Michigan has that responsibility to providing essentially welfare to the lower-income working people?

Snyder hopes the state's lawmakers -- the majority Republican -- will pass his tax proposal 'as is' by May.

I'm Jennifer Guerra for Marketplace.

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