State governments can’t solve inflation by sending people money, but that doesn’t mean they won’t try.
California has announced that 23 million residents will be getting checks for up to $1,050 for the purpose of “inflation relief” as part of the state’s budget deal for the upcoming fiscal year.
Politicians are pulling these funds out of the state’s $97.5 billion surplus. California’s surplus this year was larger than most states’ entire budget.
The checks will be sent in late October. The elections for governor, lieutenant governor, half the state senate, and all the state assembly will occur on November 8. How convenient.
Ultimately, inflation is for the Fed to solve, and Newsom doesn’t control the FOMC (thank goodness). There’s no such thing as “inflation relief” at the state level. We must see this scheme for what it is: bribing voters with their own money in an election year.
Implicit in the policy is an admission that California takes too much of its residents’ money to begin with. California has the highest sales-tax rate, the highest gasoline-tax rate, the fourth-highest income-tax collections per capita, and the fifth-highest overall state-and-local tax burden of any state. Plenty of Californians could move to a lower-tax state and effectively see their incomes increase by hundreds of dollars every year, not just in an election year when Gavin Newsom is feeling generous. (And plenty have: As Dan McLaughlin noted earlier this year, U-Haul ran out of trucks leaving California.)
Instead of taking this massive surplus as an opportunity for sensible tax reform, Newsom and the state legislature are content to pretend to solve inflation with it. That likely means that next year — when there isn’t an election on the horizon — Californians will have the same anti-growth, big-government policies they have right now, minus these checks.
Giving people more money to buy the same quantity of goods can’t help to reduce inflation. These checks will have negligible effects on inflation nationwide; the total package amounts to $17 billion, which is small potatoes in an economy worth about $25 trillion.
But there’s plenty that California could do to increase its economic competitiveness. Instead of gimmicky, one-time policies, it could permanently lower its gas tax to a level more on par with other states. California’s gas tax is 68.15 cents per gallon, far higher than the median rate of 31.61 cents per gallon.
The state should also reduce its hostility to energy production and transportation. Newsom signed a law in 2019 prohibiting the construction of pipelines on state property. The difficulty in building pipelines is one reason for California’s high energy costs, as petroleum products must be shipped in through other, less efficient means.
Newsom also took executive action in 2021 to “phase out oil extraction in California.” That included ending all fracking permits by 2024 and ending all oil extraction by any means by 2045. It should be no surprise that oil companies don’t want to invest in California now, given those promises from the state government. Two of the state’s oil refineries are currently being converted into renewable-fuel facilities, which means they aren’t producing gasoline and diesel right now.
Then, there’s the California environmental regulations that contribute to port congestion. BNSF Railway has wanted to build a massive intermodal yard near the Port of Long Beach since 2005 — using $500 million of its own money, not begging for public funds — but California’s environmental regulators have stood in the way. That’s capacity we could use right now, but it doesn’t exist because of California’s regulatory regime.
Instead of addressing those real problems or reducing California’s tax burden, politicians in Sacramento will instead be refunding the taxpayers some of the money they took from them, just this one time. If their goal is to reduce inflation, it will not work. But given the electoral calendar, that’s probably not their true goal anyway.