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In the not-too-distant past, lawmakers viewed direct government payments as a way to help households shore up their finances against the pandemic’s impact.
Now, in a sign of the economy’s changing headwinds, direct checks are being billed as a way to soften inflation’s bite. But instead of the federal government issuing payments, a growing number of states are cutting checks made possible by budget surpluses.
California is the latest state to join the ranks of more than 10 others that have authorized direct payments to residents. Meanwhile, legislators in states including New Jersey and Indiana are calling for direct cash relief.
Under a California budget agreement reached over the weekend, an estimated 23 million Golden State residents will receive payments up to $1,050. Similar to the rules on the three federal Economic Impact Payments (better known as stimulus checks), the California inflation relief payments hinge on the amount of income and dependents in the household. Here’s information on who qualifies.
Whatever the amount, recipients will certainly find ways to spend it. California has the priciest gas in the nation, according to AAA. On Tuesday, the state’s average price per gallon was $6.30, compared to $4.88 nationally.
Last year, California joined Maryland and Idaho as the three states issuing direct payments based on extra budget cash, said Richard Auxier, senior policy associate at the Tax Policy Center. California and Maryland’s 2021 payments were aimed at lower-income households while Idaho’s payments were more across the board.
This year, California became the 15th state to green light payments, he said. The list includes: Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois and Maine. The payment timing, amounts and eligibility rules vary, Auxier said.
“The thing all these states have in common is they have surpluses and they are using part of the surplus to send checks. … As inflation has become a bigger and bigger issue, you have seen politicians frame them as inflation assistance,” Auxier said.
The cost of living increased 8.6% year-over-year in May, remaining at a red hot 40-year high, according to federal data.
The payments are separate from other types of relief lawmakers are eyeing and sometimes enacting, including pauses to state-level gasoline taxes. President Joe Biden wants a three-month halt on the 18.4-cent federal gas tax too.
Announcing the budget deal, California Governor Gavin Newsom and the state’s political leaders said the “centerpiece” was its $17 billion “inflation relief package,” which will fund the direct payments. The spending plan “prioritizes getting dollars back into the pockets of millions of Californians who are grappling with global inflation and rising prices of everything from gas to groceries,” they said.
States can afford to be generous thanks to several factors, Auxier explained. By 2019, state balance sheets had moved beyond the Great Recession’s toll, but then came the pandemic’s early 2020 shockwave. Jobless claims soared while sales tax revenue dropped.
Next came “the massive response from the federal government,” in the form of three rounds of stimulus checks to residents, extra unemployment insurance, monthly advances on the child tax credit and extra funding to state governments.
As higher-earning households generally fared better in lockdowns favoring remote work, they held onto their jobs — and were able pay higher tax rates.
“You had this whiplash: Things are incredibly bad to actually, nope they are way better than anyone possibly anticipated,” Auxier said.
Which other states will hand out cash payments?
Considering the budgeting schedules of many states, most that are going to authorize payments have already done so by now, Auxier said.
In New Jersey, lawmakers must have a new budget in place by July 1, said Micah Rasmussen, director of Rider University’s Rebovich Institute for New Jersey Politics. State legislators are scheduled for a Wednesday vote on the budget, according to the Associated Press.
When the vote happens, there’s a “very strong likelihood” that’s going to include a $2 billion program that will have $1,000 or $1,500 credited against homeowners’ property tax bills, depending on income. It will also send $450 direct checks to renters, Rasmussen said. The program would roll out over several years.
State Republicans wanted direct payments on a broader scale, dubbing it their “Give it Back” plan.
“In New Jersey, we have a very strong, longstanding aversion to the property tax,” Rasmussen noted. It’s inflation that’s given lawmakers the “urgency” to earmark the money this way.
In Indiana, Gov. Eric Holcomb has called for a special session of the legislation to begin July 6. There are two very visible parts of the agenda: the future of the state’s abortion laws after the Supreme Court overturned a woman’s constitutional right to an abortion under the 1973 decision Roe v. Wade.
There’s also the question of more direct cash to residents.
Indiana’s budget laws are already designed to send tax rebate money back to households when there’s a certain amount of surplus, said Kyle Anderson, an economist at Indiana University’s Kelley School of Business. That amount comes to roughly $125 this year, he said. But Holcomb is asking for additional $225 payments and Anderson thinks “this is very likely to pass.”
But can ‘inflation checks’ make inflation worse?
Lawmakers want to ease the price pinch when people buy groceries, or fill up at the gas station. But is the solution just going drive up demand and make inflation worse?
It’s worth proceeding with caution, said Ben Gitis, associate director of the Bipartisan Policy Center’s Economic Policy Project.
Direct checks from state budget surpluses are “not a big step in the wrong direction, but it is a step in the wrong direction in terms of tackling the underlying problems,” Gitis said.
Spending on workforce development to address tight labor supply or other initiatives to ease supply chain woes could better target the root causes of higher prices, he said. “But if you are spending on something directly meant to support household spending, that’s where I think you run into some of the problems.”
In theory, Auxier and Anderson both see how that argument could apply. But in reality, given the relatively small amounts of cash, both doubt the inflation relief checks would make matters worse.
Besides, Anderson noted, if states like Indiana put the money towards public spending projects instead of direct payments, that could potentially drive up costs too.
Auxier’s real concern is the 10 states that recently slashed their income tax rates in light of ample surpluses. Recession worries keep coming. If the economy deteriorates, Auxier said those states would have “real problems because they fundamentally changed their ability to collect tax revenue.”
