California offers free money in bid to ease inflation

California offers free money in bid to ease inflation

The California state government is pressing ahead with its plan to send free money to people to ease the pain of inflation.

On Tuesday, state Senator Nancy Skinner (D-Berkeley) tweeted a reminder that in October, Californians who filed their 2020 tax return should start seeing checks appear in their mailboxes through the Better for Families tax refund program.

Initial sketches for the program were announced in late June as part of the budget deal struck between Governor Gavin Newsom, a Democrat, and state legislative leaders.

The $9.5 billion program will provide checks of up to $1,050 depending on an individual’s income, enrollment status, and number of dependents. Single file owners who earn more than $250,000 (or joint file owners who earn more than $500,000) are not eligible for checks.

Just like the inflation-reduction law passed by the US Congress last month, these tax refunds are likely to exacerbate the problem they are trying to mitigate.

The program puts cash in the hands of low- and middle-income consumers with a higher marginal propensity to consume. This is a great way to say that they are more likely to spend this money than to save or invest it. This is especially true in an inflationary environment where prices are rising rapidly.

Increased demand at the state level will also boost prices.

There is already evidence that everyone’s federal checks have increased inflation. It is estimated that the $1.9 trillion US bailout, passed in March 2021, which included $1,400 stimulus checks, raised inflation by three percentage points.

It is important to note that the state issues these tax refunds because it has to. The complex budget mechanism known as the Gann Limit requires the California government to return budget surpluses to taxpayers or spend them on certain budget categories such as infrastructure and education.

One libertarian argument might be that, given Jane’s limit, it is better to return that money to the taxpayer than to let the state bureaucracies spend it on public works and public programmes.

This is a fair enough perspective. The matter is complicated by the fact that the state is mostly flush with revenue due to higher-than-expected tax returns from high-income earners. Many of these high-income earners either will not qualify for the Better for Families program. That’s why Better for Families is an income redistribution program. For many beneficiaries, their payments may exceed the burden of state taxes.

Leaving money for government bureaucracies to spend, which has obvious libertarian flaws, would probably be better for inflation. Those bureaucracies will be slower to spend money and therefore less likely to increase demand.

Even better, California politicians can return the state’s budget surplus to the high-income earners who funded it. That would be more fair. It is also unlikely that inflation will increase because higher-income earners have a lower marginal propensity to consume.

This is not what the country’s politicians did. The country’s consumers will now reap the consequences.

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