On Friday, I wrote about the delusional policies many states are pursuing in response to high gas prices. Among those are one-time tax rebates and short-term tax holidays. I argued that states are missing a huge opportunity to make meaningful, long-lasting reforms to their tax codes and fix other budgetary problems.
Today, Jared Walczak of the Tax Foundation has a blog post about how tax rebates and holidays don’t work. It’s not a theoretical question; these policies have been tried before. He writes:
Sending one-time checks to taxpayers is not new. The federal government sent multiple rounds of checks since the pandemic began, of course. During the Great Recession, most taxpayers received a refundable tax credit in 2008 and certain SSI recipients received a $250 payment in 2009. Before that, the 2001 Bush tax cuts included $300/$600 tax credits, and 1975 legislation provided a rebate of 10 percent of taxes paid the previous year, up to a maximum of $200.
In surveys, 25-30 percent of recipients tend to indicate that they will spend the additional money, compared to saving it or using it to pay off debt. Economic studies tend to support moderately higher levels of additional consumption than is self-reported in these surveys.
In the past, however, most one-time spending through the tax code was in response to an economic downturn, and thus typically came at a time when consumer spending was below average, and when the money was intended to help people keep up with ongoing expenses.
The year of the 2001 tax cuts, consumer spending increased a modest 1.6 percent. It declined about 1 percent per year in 2008 and 2009, when further payments were made. In 1975, it simply recovered to what it had been before a dip in 1974. Last year, by contrast, consumer expenditures soared more than 7 percent, and are about 4 percent higher in real terms than they were before the pandemic. Personal income, meanwhile, is up 8 percent (inflation-adjusted) since 2019, boosted by both direct and indirect federal assistance.
Walczak’s entire post is worth your time, and it includes better ideas for states to pursue instead. Check it out here.
States are using their budget surpluses to double down on policies we know don’t work. They aren’t addressing the actual problems with energy prices, most of which are not their fault, but some of which are — take New York’s refusal to approve new pipelines, for example. Instead, they are all too willing to pander to voters with one-time handouts that won’t help that much in the short run and completely ignore the long run.