California Providing Free Money In Attempt To Mitigate Inflation

California’s state government continues to push ahead with plans to send free money to individuals to alleviate the inflation pain.

On Tuesday, state Sen. Nancy Skinner (D–Berkeley) tweeted a reminder that in October, California residents who filed a tax return in 2020 should start seeing checks appear in their mailboxes courtesy of the Better for Families tax refund program.

As part of the budget agreement between Gov. Gavin Newsom is a Democrat and the leaders of state legislative bodies.

The $9.5B program provides checks worth up to $1.050 to eligible filers, depending on their income, filing status and the number of dependents. Checks are not eligible for single filers with incomes above $250,000, or jointly filed filers making more than $500,000

These tax refunds, much like the Inflation Reduction Act that was passed by Congress last month will probably exacerbate what they are trying to reduce.

It puts money in the pockets of consumers who have a greater marginal consumption propensity than those with lower and moderate incomes. This is a fancy way to say they are more likely spend the money than saving it or investing. In an inflationary environment, where prices are increasing quickly, this is particularly true.

Also, a higher statewide demand can increase prices.

Already evidence exists to show that the federal checks for all increased inflation. One Federal Reserve Bank of San Francisco Analysis estimates that the $1.9 trillion American Rescue Plan passed in March 2021 with $1,400 stimulant checks has raised inflation by 3 percentage points.

The state issues these refunds to taxpayers as a matter of course. The Gann Limit, a convoluted budget system that requires California to either return surpluses to the taxpayers or use them in a handful of budget categories such as infrastructure and education.

A libertarian argument might be that it is better to give that money back to the taxpayers, rather than letting state bureaucracies use it for public programs and works.

It’s an acceptable perspective. Problem is that high-income earners have higher tax returns than anticipated, which makes the state incredibly rich. Most of the high-income earners won’t get into the Better for Families Program. Therefore, the Better for Families program works as an income redistribution tool. Many recipients may receive a payout that exceeds their state taxes.

Inflation would be improved if money was left to the state bureaucracies for them to spend. This has obvious libertarian drawbacks. These bureaucracies are less likely to increase demand and would therefore spend money slower.

California politicians might return surplus funds to high-income Californians who paid them. It would be more fair. Because higher income earners are more likely to be able to afford less, it would make inflation much lower.

State politicians didn’t do that. Now, the state’s customers will reap the rewards.