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Policy

On the road to another tax increase that will hit low-income earners hardest

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Two years ago, Michigan raised taxes on the working poor. It was reported plenty at the time; it should be no surprise. 

If you want to be technical about it, the state didn't so much raise taxes on the working poor. It reduced the tax credits that went to the working poor. The Michigan League for Public Policy estimates that prior to 2011, the average low-income family in Michigan received a tax refund of $446. In 2012, that refund dropped to $138. The MLPP says the change means that about 15,000 fewer families were lifted out of poverty as a result of the credits. 

None of this is news. The change happened two years ago. 

Why bring it up now? Because right now Michigan leaders are considering another tax increase that will have a disproportionate impact on the state's working poor.

Before we dive into that, here is some context to consider: According to an analysis from the Institute on Taxation & Economic Policy, low-income earners in Michigan already face the highest tax burden of any income group. Here's a table from ITEP's website

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Credit Source: ITEP report "Who Pays? A Distributional Analysis of the Tax System in All 50 States" / Institute on Taxation & Economic Policy

By total dollar amount, of course, high-earning families pay more in taxes in Michigan. But, as a percentage of income, the lowest earners pay the most. The reason is not difficult to understand. It's mostly because of state sales and excise taxes. If you've got a lot of money, these taxes don't make as much of a dent in your earnings. But for people living below or near the poverty line, it's a big deal. 

That brings us to a piece of legislation approved last week by Michigan's state Senate. The bill would raise taxes on gasoline over the next four years to help pay for improvements to the state's crumbling road infrastructure. Gov. Rick Snyder told reporters after winning re-election earlier this month that fixing the roads would be his top priority, and raising gas taxes has long been the preferred way to raise the money to do so. 

My colleague, Jake Neher with the Michigan Public Radio Network, reported last week that the legislation approved by senators could increase road funding by $1.5 billion per year. If that scenario came to pass, the state Senate Fiscal Agency estimates prices at the pump would rise by nearly a dollar a gallon for Michigan drivers. A quarter of that amount would be due to taxes. 

Is it really too much to ask people to pay an extra quarter per gallon of gasoline to help improve our roads? Different people will have different answers to that question, of course. But one thing worth keeping in mind is that some families in Michigan clearly need that quarter more than others. 

The Michigan League for Public Policy has been active in the debate over how to fund Michigan's road improvements. The proposed solution that passed the state Senate last week was actually the approach preferred by the MLPP. It's not that it's a great option for low-income families in Michigan. It's just the least-bad option, according to a policy paper the MLPP released last week

While any increase in taxes will have a negative impact on low-income individuals and working families, replacing the gas and diesel flat taxes with a tax based on the wholesale price of gas would likely have the least harmful effect …

So, while Michigan's leaders may be pursuing the "least-harmful" approach to funding our road improvements, it will still be a harm that's inflicted most heavily on those who are least able to pay. 

The MLPP has been pushing for legislators to consider an option to offset the gas tax increase by restoring some of the tax credits for low-income families that were rolled back two years ago. But that rollback doesn't appear to be on the table at the moment. What's on the table is simply another tax increase. 

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