Michigan Triples Down On The Most Abused Federal Program

The U.S. Government Accountability Office released its FY 2014 estimates of improper payments made by the Federal Government in testimony before the U.S. Senate’s Committee on Homeland Security and Government Affairs on Monday. The Improper Payments Information Act of 2002 and the Improper Payments Elimination and Recovery Act of 2010 require Federal Executive Branch agencies to estimate the levels of improper payments in all Federal programs. The GAO assembles this data and reports the levels of improper payments, along with recommendations to minimize such improper payments.

At the Federal level, all improper payments amounted to about $ 125 billion dollars in FY 2014. Even by casual Federal accounting standards this is breathtaking.  Three cents of every Federal Government dollar spent. Going through the GAO’s estimates by program, the Earned Income Tax Credit is at the top of the list by percentage of improper payments: 27.2 % of all EITC payments are improper. The GAO estimated FY 2014 improper EITC payments by the Federal Government alone amounted to $ 17.7 billion dollars. Other Federal programs burned more dollars, but none had the percentage rate of improper payments that the EITC has. Not even close.

The most obscure element of the tax increase package which Michigan voters will be asked to approve on May 5th is Senate Bill 847 of 2014. This bill is a $ 260 million annual increase in the State of Michigan’s version of the EITC. The EITC will increase from its current 6 %, to 20 %, of the Federal EITC credit allowed under Section 32 of the Internal Revenue Code. Currently, the Michigan EITC pays out about $ 80 million from the Michigan Treasury every year at the 6 % rate.

The EITC is a negative income tax dating back to the Nixon Administration at the Federal level which is paid out through income tax refunds. Report an income below the EITC threshold and you get back more in a tax refund than you actually had withheld in taxes. The Michigan EITC clones the Federal system, using the same tax filing to establish identical eligibility, but at the Michigan rate. Thus an improper refund of the Federal EITC creates an improper refund of the Michigan EITC.

The GAO cites three underlying causes of improper Federal EITC refunds::

– an inability to authenticate requirements
– improper income reporting
– an inability to verify claimants’ income prior to processing

They politely declined to mention outright tax fraud, but Southeastern Michigan is indeed a hotbed of income tax fraud – witness the State of Michigan having to step in and collect Detroit’s income tax.

The very same improper refunds plague Michigan’s EITC. Should the May 5th ballot proposal pass, 27.2 % of the additional SB 847 EITC refunds will be improper. $ 70 million in additional improper refunds every year, over and above the current $ 21.75 million in improper Michigan EITC refunds. $ 92 million in Michigan Government revenues up in smoke every year.

The tax and spend crowd will certainly say that $ 70 million a year is a small fraction of the $ 2 billion in play on May 5th. Michigan’s $ 92 million annual total in improper EITC payments will almost equal the $ 96.6 million the Michigan Combined State Trunkline Bond and Interest Redemption Fund spent in 2013 retiring bond principal – the initial use of the May 5th proposal revenue. Your money going up in flames.

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