Flush With Cash, States Are Raining Down Rebates on Taxpayers Across the Country

State government coffers across the country are so flush with federal Covid relief cash that many of them are doing something governments rarely do — returning some of that money to the taxpayers from whom it came.Virginia has proposed a one-off $500 rebate to its residents, and Connecticut is giving parents $250 for each dependent child per household. New York is handing out $1,000 rebates to homeowners, and Governor Newsom of California has suggested sending $400 to every vehicle owner in that state to help defray high fuel costs.New Mexico’s Democratic governor, Michelle Lujan Grisham, has gone as far as to call a special session of the state legislature to talk about economic relief, and gas tax holidays have been enacted in at least four states. Residents of Maine started getting $850 rebate checks in the mail this week.In all, at least 10 states have passed such measures so far this year and others are considering doing so. The reason? Most are sitting on piles of cash. Tax revenues to the states totaled more than $1 trillion in 2021, a 14.5 percent increase versus 2020.The director of state fiscal studies at the National Association of State Budget Officers, Brian Sigritz, explains why: At the outset of the pandemic in the spring of 2020, many states sharply reduced their revenue forecasts for the coming year — and there were declines in most cases, he said.State officials plotting out budgets for the following year expected more of the same, Mr. Sigritz said, “but what we ended up seeing greatly exceeded expectations.”Much of the bump came in the form of handouts to the states from the U.S. Treasury.President Trump signed off on more than $150 billion in aid for state and local governments in the early days of the pandemic and President Biden topped that off with another $350 billion, of which $195 billion went to states, in his American Rescue Plan last year. The same plan sent even more money to the states for everything from K-12 education and rental assistance to child care and capital improvements.Other factors played a role as well. States were expecting the worst in the pandemic’s early days, but those fears didn’t play out. Upper-income employees were relatively unscathed compared to those making lower salaries, so income taxes held sort of steady, and consumers continued to buy goods, which bring in sales taxes, throughout the pandemic while cutting back on services, which are taxed less by states.For 2022, Mr. Sigritz said, it’s more of the same.“We continue to see nearly all states seeing revenue above expectations and many states are looking at having budget surpluses again this year,” he said.The silver lining for taxpayers may have darker implications for the overall economy. Economists are not all in agreement on the potential impact, but some suggest that pumping additional money in the form of rebates or tax holidays into an already inflationary economy will only exacerbate the situation.A vice president at the Tax Foundation’s Center for State Tax Policy, Jared Walczak, argues that handing out money to taxpayers during a period of high inflation caused primarily by supply-side pressures will only increase overall demand and fuel that inflation even further.“The key problem we have right now is that we have too many dollars chasing after too few goods,” Mr. Walczak said. “Policies like these are injecting the economy with even more dollars that are likely to be spent in the short term.“They do nothing to the supply side of the equation and will only contribute to higher prices,” he added.Mr. Walczak suggests that states should be using what federal Covid money remains in their coffers to provide relief for those who need it most — low-income residents hit hardest by inflation, perhaps — and focus instead on long-term structural changes.“What is needed is long-term consistent tax relief rather than one-off checks,” he said.Some states are already headed in that direction, passing more lasting relief measures because of their unexpectedly healthy balance sheets. For the 2022 fiscal year, which began July 1, 2021, and ends this month, 24 states reduced their personal income tax rates and 16 reduced corporate taxes. Another 15 lowered their sales tax rates. Mr. Sigritz of the state budget officers’ association warns that state taxpayers shouldn’t expect the party to continue. States, like consumers, are paying more for everything in the current environment, so budgets are getting tighter, and the overall economy is slowing, so the rebate checks will likely end soon.“We are anticipating revenue growth again next year, but slower growth than we have seen the last two years,” he said.

Flush With Cash, States Are Raining Down Rebates on Taxpayers Across the Country

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