Your Check's in the Mail: States Give Tax Refunds to Cushion Inflation

This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.

DENVER — This month, Colorado taxpayers began receiving refunds from the state government. Joint filers got $1,500, and single filers got $750. Enclosed was a letter from Democratic Gov. Jared Polis, who noted that the checks — required under the state constitution — were being mailed ahead of schedule, due to a law passed this session, to help people cope with rising prices.

“At a time when inflation is causing increases in the cost of everyday items, we are committed to getting this money to you as quickly as possible,” Polis wrote.

Taxpayers in over a dozen states are getting refunds this year, as both Republican and Democratic state leaders seek to spend down budget surpluses and help residents cope with inflation. Although some of the refunds are required by decades-old laws that limit the growth of state spending, as in Colorado, governors are still touting those refunds as inflation relief.

But while the checks will help individual taxpayers, economists point out that if too many states send out too much money, the refunds could potentially make inflation worse.

“It’s not a great economic policy,” said Kyle Anderson, a business economics professor at the Indiana University Kelley School of Business. “No economist would say, ‘What we really need to be doing are stimulus checks right now,’ especially when unemployment is extremely low.”

Functionally, the refunds aren’t so different from the stimulus payments the federal government sent out in 2020 and 2021, and some states made last year. Back then, lawmakers were worried that COVID-19 and public health measures to contain the virus would trigger a severe recession. So, they sent families money to help them pay the bills and keep shopping.  

Now inflation has soared as demand for some goods and services outpaces supply. Consumer prices were 8.5% higher in July than they were a year ago, and lawmakers again are saying families need help making ends meet. 

“We know that folks are stressed with inflation,” said Indiana state Sen. Travis Holdman, a Republican and chair of the majority caucus. “Even though gas prices are coming down.”

Prices have recently been rising worldwide for a variety of reasons, including supply chain disruptions due to COVID-19 and the Russian invasion of Ukraine. From that perspective, the money states in the U.S. spend on refunds isn’t likely to have a huge effect on inflation, economists say. Experts also say mailing checks doesn’t make much sense.

“Fundamentally, injecting more dollars into an economy where supply is already struggling to keep up with demand simply boosts inflation,” said Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation, a Washington, D.C., think tank. 

Politically, however, lawmakers are under pressure to help people squeezed by rising prices, particularly in an election year. And many states are dealing with record surpluses. In some states, there’s so much additional money coming in that policy makers are required by law to return it.

That’s the case in Colorado and Hawaii, where constitutional amendments dating to 1992 and 1978, respectively, limit the growth of state spending. In Indiana, a 2011 law triggered $125 refunds this year, and a 1986 law may trigger tax refunds in Massachusetts. 

Some lawmakers also say returning excess tax dollars is the right thing to do. 

Indiana, for instance, has $6.1 billion in general fund reserves, triple the usual amount. In addition to the required $125 refunds, state leaders this month approved additional $200 checks for both taxpayers and retirees who rely on Social Security. 

“We are giving people’s money back to them,” said state Rep. Tim Brown, a Republican who chairs the House Committee on Ways and Means. “We have a reserve balance that is above what we think we need to run state government.” 

This marks the second year in a row some people have received bonus checks from their state government. 

For instance, some California taxpayers last year received a $600 or $1,200 stimulus check, depending on income and family size. Some families later received an additional $500. This year, a wider group of taxpayers are getting tax refunds of between $200 and $1,050, depending on family income and size.

Last year, all Idaho resident taxpayers got refunds worth $50 per person, or 9% of income taxes owed in 2019, whichever was greater. This year, they’re getting even bigger checks: $75 per person or 12% of taxes owed in 2020, whichever was greater.

In some states, taxpayers will receive multiple checks this year alone. 

New Mexico lawmakers in February approved $250 refunds for single filers earning under $75,000 and $500 refunds for joint filers earning under $150,000. In April, they approved two more rounds of $250 and $500 refunds, this time for all single filers and joint filers, regardless of income. They also added refunds for residents who don’t file income tax returns, such as people who rely on Social Security or earn too little to owe taxes. 

People who qualified for all three rounds got three payments, in June, July and in August.

New Mexico state Rep. Christine Chandler, a Democrat who chairs the House Taxation and Revenue Committee, said the refunds approved in February — before gas prices started to soar — were mostly motivated by the state budget surplus (estimated to be $1.6 billion when the legislature convened). 

“I think it was a recognition that our revenue stream was extremely healthy, and that we had sufficient funds that we were able to give some money back to taxpayers,” Chandler said. 

The refunds approved in April were prompted by inflation concerns, she said. “The conversation changed, because we were much more focused on the need to provide support, or relief, to our citizens.” 

Lawmakers say they’re not too worried about tax refunds contributing to inflation. The $9.5 billion California lawmakers are spending on refunds this year will help families put food on the table, said Democratic state Rep. Phil Ting, chair of the Assembly Budget Committee. 

“While $9 billion is a lot of money to those individual families,” he said, “it’s not really enough money to make an impact on California’s $3.4 trillion economy.”

GOP members of Congress voted for a huge COVID-19 relief package under former President Donald Trump, but they blame the latest round of relief, the American Rescue Plan Act, for increasing inflation.

“[In Indiana] the funds used to send back checks were overpayments and excess reserves that we have,” Holdman said. “The federal government used borrowed money. So, we don’t think it’s going to have an impact on inflation nearly to the level of the federal payments.”

State lawmakers who want to tamp down inflation might want to spend extra money on debt payments or pension obligations, economists say — anything that doesn’t involve injecting more cash into the economy. 

Some states are doing so. Indiana lawmakers spent $545 million on teacher pensions last fiscal year, under the same law that triggered the $125 refunds. They passed legislation during the August special session that could put $1 billion more into teacher pensions next year, depending on the size of the state surplus.

As state lawmakers look to spend down massive surpluses, it may be hard for them to avoid policies that could contribute to inflation. 

Launching, say, a new road-building program would boost construction employment and demand for materials, Anderson, of Indiana University, noted. “That could be inflationary as well.”