In Some States, Working Poor Could Pay More Taxes

Several states want to scale back or eliminate a tax credit for the working poor, as they try to balance their budgets. Anti-poverty groups say some of these same states also want to cut taxes for businesses.

Governors say they're trying to balance the need to promote jobs with deficit reduction. But advocates say the poor are being asked to bear an unfair share of the burden.

The tax break is called an earned income tax credit, or EITC. About half the states offer residents an EITC on top of a similar credit available from the federal government.

Ramona Spencer is a single mother of five who lives in Lansing, Mich. The state's Republican governor, Rick Snyder, has proposed eliminating the Michigan EITC, which is 20 percent of the federal credit.

"Four hundred dollars may not seem like a lot to a lot of people," Spencer says. "But when you are already living on the bottom rung of society, you feel the difference."

Spencer says she used the credit last year to buy glasses for her disabled adult son, whom she cares for. She's worried about what she'll do if the state Legislature agrees to the governor's proposal.

Four hundred dollars may not seem like a lot to a lot of people. But when you are already living on the bottom rung of society, you feel the difference.

"My son would either have to go without the glasses, or we would forgo doing other things. We would literally not have the gas to go or maybe not be able to pay one of our utilities," Spencer says.

But in some ways, Michigan is in the same boat as Spencer. Money is tight. The state faces a $1.8 billion deficit, and Snyder says eliminating the state EITC would save $340 million.

"We're in a severe budget situation, and when you looked at the priorities of what we could do, my view is let's help people on the very front end, on the safety net feature, and work hard to make sure we're keeping those programs in place, " he recently told reporters.

Snyder says his budget would preserve other safety-net spending, such as state Medicaid and welfare.

But anti-poverty advocates note that Snyder's budget also would cut business taxes by $1.8 billion.

"How does this make sense in terms of shared sacrifice?" asks Gilda Jacobs, CEO of the Michigan League for Human Services.

Jacobs says eliminating the state EITC will push 14,000 Michigan children into poverty. And, she says, it will hurt the local economy because the poor tend to quickly spend the money they get on things such as housing and food.

"The people that receive the EITC, they don't pay high expensive lobbyists, so they're easy pickings," she says.

But Snyder says it's really about creating jobs in a state with severe unemployment.

Other states are also targeting the EITC. Scott Walker, Wisconsin's Republican governor, hopes to save $41 million by revising his state's credit for the working poor. And New Jersey Gov. Chris Christie, also a Republican, last year proposed a cut in his state's EITC, and the Legislature adopted the change. Lawmakers in Kansas and North Carolina are looking at similar proposals.

Nick Johnson of the Center on Budget and Policy Priorities in Washington, D.C., says it's odd because the EITC has long been favored by both Democrats and Republicans as an effective anti-poverty tool. One reason is that it goes only to people who work.

"We're not necessarily talking about the very poorest of the poor," Johnson says. "We're talking about working families who are trying to stay off of welfare, trying to avoid turning to the state for other kinds of help."

It's a transfer payment is what it is.

But the credit has drawn criticism from fiscal conservatives, in part because it's refundable. That means people can still get it, even if they don't owe taxes because their incomes are so low.

"Actually, it's a transfer payment is what it is," says Michael LaFaive with the Mackinac Center for Public Policy, a Michigan-based think tank. "In order for them to spend this money, it first has to be taken from other people and business. So these transfer payments just effectively rob very productive people and shift it to lower-income individuals."

LaFaive thinks the best way to fight poverty is with a healthy economy and the best way to get that is to let individuals and businesses keep the money they earn.

Spencer, who earns $13,000 a year teaching kids nutrition and gardening, takes issue with any suggestion that she's getting a handout. She says she's received direct government aid in the past and knows what that's like.

"That part is humiliating. Being able to get a credit is not. I feel like I've earned that, and I'm entitled to it. It is not a poverty handout," she says.

Spencer just hopes the tax credit sticks around long enough that she can keep getting it until she's able to earn enough money that she no longer needs any help at all.