Cash-Flush States Offer "Inflation Relief." NewsWire

NewsWire: 7/20/22

• California is among a handful of states planning to send residents “inflation relief” checks. These initiatives are funded by the large budget surpluses that many states have been sitting on thanks to higher-than-expected tax revenues and federal aid. (Axios)
• NH: Around 23M Californians are going to receive “inflation relief” checks of up to $1,050 as part of a new budget deal signed at the end of June.
• California joins a growing list of states—among them Georgia, Delaware, New Mexico, Maine, Idaho, Colorado, Illinois, and Virginia—that have approved new stimulus payments for residents to help ease the pain of rising prices. Most of these payments are in the form of tax rebates and have been enacted by both Democratic and Republican governors.
• Normally, states don’t engage in fiscal policy because, unlike the federal government, they must balance their budgets. But many states are currently flush with cash due to unprecedented amounts of federal pandemic aid and higher-than-expected tax revenues. In 2021, states’ collective rainy day funds and leftover budget dollars both rose to their highest levels ever.
• Some economists warn that inflation rebates may end up worsening the very problem lawmakers are trying to address by increasing demand and pushing prices even higher. But other economists can plausibly argue, to the contrary, that states are helpfully compensating for the extremely rapid fiscal drag that has resulted from the post-pandemic shrinkage of the federal deficit. (In May, the monthly federal deficit shrank to -$66B—a 50% decline YoY.) They argue that states are slowing the impact of the federal fiscal cliff by spending a lot of the federal money that they let build up in their coffers over the past two years. 
• Who's right? It may not really matter. Helpful or hurtful, this spending probably isn't big enough to make a significant difference in the macro economy. The inflation-relief package in California, which is by far the biggest of all the state offerings, amounts to an estimated $17B. That's not much in macro terms--not even 0.1% of annualized GDP in Q1 2022.
• But even these efforts can't do much for the macro economy, they may put some states in danger. California, for example, differs from other states in that it gets most of its revenue (66%) from personal income taxes, which includes investment gains. More than half of this personal tax revenue comes from the top 1% of earners. (Those that haven't yet moved to TX or FL, I suppose.) 
• According to Pew Trusts, the state's reliance on a very progressive personal income tax is what makes California's revenue the 6th most volatile in the nation. The recent stock market drop has already taken a chunk out of CA revenues. Governor Newsom might feel comfortable spending surplus funds now, but if a recession hits, the state will likely be facing down major budget cuts.