Could Idaho’s new tax rebates worsen inflation? Here’s what experts say
Idaho is one of many states across the country issuing tax rebates this year to relieve consumers from inflation.
As inflation — which has climbed to 8.5%, a 40-year high — and supply chain bottlenecks drive up the costs of goods and services, Idaho Gov. Brad Little last month called a special session of the Legislature to consider a bill that would return money to taxpayers.
Idaho is expected to have a $2 billion surplus at the end of the fiscal year. On Thursday, lawmakers OK’d Little’s proposal to spend a quarter of the money on tax refunds.
“Our economy just keeps growing and growing,” Little said during a news conference last month announcing the special session. “This takes an existing budget surplus and puts it into inflation.”
Republican- and Democrat-led legislatures in more than a dozen states, including California and Indiana, have made similar moves.
“When states are sitting on, often, record surpluses, and taxpayers are struggling to pay the bills, it’s hard not to act,” said Jared Walczak, vice president of state projects for the Tax Foundation, a Washington, D.C.-based think tank. “And this has been one of the solutions that policymakers across the country of both parties have landed upon.”
But are tax rebates effective at helping consumers cope with rising costs? Or do they compound inflation by injecting more money into the economy?
While experts disagree on the exact effects of the rebates, they generally agree that the effects are likely minimal.
Will rebates worsen national inflation?
Inflation hasn’t caused consumer spending to dramatically drop off; people aren’t significantly curtailing the amount of fuel or groceries they purchase as costs go up, Walczak told the Statesman by phone.
“They are bearing the additional expense,” he said. “That doesn’t mean that there’s no reduction (in spending), but they’re not, for the most part, pinching pennies.”
Researchers don’t know much about how consumers spend tax refunds, Walczak said. But “inelastic” demand for core goods — most people will continue to need the same amount of basic items — suggests rebates may help taxpayers save more money, he said.
It’s also unclear whether an influx of $500 million into the economy would actually drive prices higher.
Economists blame federal stimulus amid the COVID-19 pandemic for contributing to inflation. A rush of money drove demand for goods, but supply couldn’t keep pace, leading to higher prices.
But William Glasgall, senior director of public finance at the Volcker Alliance, a New York-based public finance consulting firm, didn’t think Idaho’s rebates would have the same effect — because states aren’t printing new money.
“It’s either going to sit in a rainy day fund or a temporary account somewhere, but that money tends to get spent anyway,” Glasgall said by phone. “It’s not like states are going to hang on to this money forever and ever.”
Walczak, on the other hand, said tax refunds have a “mildly inflationary effect.” He’s not concerned, though, because a small national increase in inflation caused by rebates in Idaho will “more than offset for Idaho residents by the additional money in their pocket.”
But as more states jump on the rebate bandwagon, it could compound the problem.
“The concentration of benefits is a plus if you’re in Idaho, but a lot of states are doing the same thing,” Walczak said.
Who benefits from tax refunds?
What’s clearer is where the benefits of the tax refund will be concentrated within Idaho.
According to the new law, which Little signed Thursday, each resident who filed income taxes for both the 2020 and 2021 tax years will receive $300 — or $600 for joint filers — or 10% of income taxes paid for 2020, whichever is greater. The refunds are expected to go out this month.
The rebates mostly benefit moderate- and low-income families, “the folks hit hardest by inflation,” according to an analysis by the Idaho Center for Fiscal Policy.
It’s a much larger refund than two prior income tax rebates — $50 and $75 minimums — which the Legislature approved in its last two regular sessions.
Both Idaho Republicans and Democrats this week took credit for fighting for a higher rebate amount; several lawmakers said during Thursday’s special session they would’ve preferred bigger refund checks.
“This is far more per household than we’ve ever seen in an income tax cut bill,” House Minority Leader Ilana Rubel, D-Boise, said during a news conference following the special session. “We’re really happy to see that our pressure campaign has finally yielded some results.”
