by Ross H. Yednock
August 16, 2009

The federal Earned Income Tax Credit (EITC) injects more than a billion dollars directly into the pockets of Michigan’s working families every year. Clearly, this is a good thing and an invaluable work support for the hundreds of thousands of eligible Michigan workers.

But as a new report shows, the EITC is also a tremendous economic stimulant to the local communities of Michigan.

The EITC is a federally funded, refundable tax credit available to low-income workers that is designed to offset the burden of payroll taxes. Michigan also has a state EITC, which was 10 percent of the federal credit in 2008 and will be 20 percent this year. In 2006 more than 677,000 Michigan households (approximately 18 percent of all households) claimed a total of $1.3 billion in EITC returns. While final numbers are not available beyond 2006, initial estimates show both these numbers increased and likely will continue to rise.

Despite this positive impact, roughly 20 percent of eligible taxpayers still fail to claim the EITC every year, leaving approximately $190 million in federal money on the table.

The Community Economic Development Association of Michigan (CEDAM) and the Michigan Association of United Ways have released a report detailing the positive impact of the EITC on Michigan communities. The report, Economic Benefits of the Earned Income Tax Credit in Michigan, was done by the Anderson Economic Group (AEG) and is the third in a series of AEG reports on the EITC. AEG’s previous reports focused on how the EITC encourages work and the true cost of a state EITC (which is about 43 percent of its appropriated cost). The new report examined the value the EITC provides toward economic stimulus.

Highlights of the report showed that in 2006, the $1.3 billion of EITC received in the state generated $2.2 billion in new economic activity, and for every dollar of EITC received, $1.67 is generated in new economic output in Michigan. The report also estimated that if all eligible workers had claimed the EITC in 2006, the additional economic impact would have been $365 million. Put another way, increasing the EITC participation rate by 1 percent would generate $3.3 million in new economic activity.

These results are backed by reports done in other states. The city of San Antonio estimates that each additional $37,000 in EITC returns results in one additional permanent job. Cuyahoga County, Ohio, found that in the first three months of 2003, EITC returns equaled all wages and salaries earned in the local hotel industry during that quarter, and the city of Baltimore determined that EITC dollars generate nearly $600,000 in local income and property tax revenues.

This economic stimulus occurs because, as the Brookings Institution states, the EITC “creates important ripple effects as dollars move among consumers, firms, and their employees.” Typically, EITC recipients use the funds to meet short- to medium-term needs: buying clothes for their children, replacing old furniture and appliances, repairing a vehicle, going on a trip, or catching up on past-due rent and utility bills.

According to the Michigan Department of Treasury, the average EITC recipient spends 37.9 percent of the credit on taxable items. This means that for every additional $25 million in EITC that is brought into Michigan, there is $9.5 million in new sales to Michigan brick-and-mortar businesses and $586,500 in new tax revenue to the state. This is on top of the “ripple effect” mentioned by Brookings and examined in the AEG report.

In Michigan, the fact remains that despite the outreach and educational efforts by nonprofit groups and some local governments to inform people about the EITC, 20 percent of eligible workers still fail to claim the EITC. While it is true that Michigan does spend $500,000 a year in General Fund/General Purpose appropriations to support Volunteer Income Tax Assistant (VITA) sites that are certified by the IRS to provide free tax assistance to low-income individuals, this amount is nowhere near adequate enough to meet the need.

In 2006, of the roughly 677,000 EITC returns filed in the state, less than 19,000 were completed at VITA sites. This is unfortunate because in addition to providing free tax assistance to low-income workers, thus enabling them to keep more money in their pockets, VITA sites are a point of entry to connect workers with other work supports like the federally funded food stamp program (it is estimated that Michigan families fail to claim upwards of $700 million in food stamp dollars every year). Additionally, VITA sites provide financial coaching and do not steer their clients toward costly, and often unnecessary, financial products like Refund Anticipation Loans.

Without question, all of Michigan benefits when people claim the EITC. It helps working families, the businesses they frequent, and the communities they call home. This is why, as policymakers look to find solutions to fix the structural revenue deficit in the state budget and spur economic growth in Michigan, they should increase support for programs with proven high rates of return.

Specifically, they should seek to increase the federal EITC take-up rate in Michigan by investing in EITC outreach and appropriating adequate funding for VITA sites. Otherwise, Michigan will continue to leave hundreds of millions of federal work support dollars on the table every year.

Ross H. Yednock is the director of the Asset Building Policy Project (ABPP) at CEDAM. For more information, go to www.cedam.info/ABC.htm. More information on EITC policy in Michigan may be found on the Michigan Statewide Earned Income Tax Credit Coalition website. To read the AEG report, click here.