A recent federal audit of the Internal Revenue Service’s handling of the Earned Income Tax Credit program found that between 21 and 25 percent of its payments were improper in 2012, costing taxpayers between $11.6 billion and $13.6 billion. This is a long-term problem, with this level of improper payments going back at least a decade.
The EITC is a form of “reverse income tax” for workers who have low incomes. It is essentially a form of welfare that grants these individuals or households a “refundable” tax credit, meaning a check is sent to the “taxpayer” for the amount the credit exceeds any taxes owed on income earned from working.
Michigan also offers EITC benefits, equivalent to 6 percent of whatever a taxpayer claims under the federal version. To get this, a taxpayer merely reports to the state the amount of their federal EITC, and gets a credit equal to 6 percent of this.
The state program costs Michigan taxpayers around $112 million annually. If the “improper payment” rate is approximately the same for Michigan beneficiaries as the nationwide average, this would mean state taxpayers are paying between $23 million and $28 million for improper payments.
There may be good reasons to support the concept of a federal EITC, but doing so at the state level is problematic for number of reasons. Such a high level of improper payments adds one more.
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