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As out-of-control inflation strains families’ budgets, lawmakers across the country are casting about for ways to respond. In Oklahoma, legislators have proposed sending taxpayers $75 checks in December ($150 for married couples) to help blunt the impact of higher prices.
In one respect, it’s a drop in the bucket, with inflation costing the average household more than $4,000 this year. But something is better than nothing—or is it?
During the pandemic, the federal government has flooded the economy with trillions of dollars that are chasing after a relatively unchanged package of goods and services. Contrary to perception, production is actually up since the start of the pandemic, and port volume is higher. Even with all the supply chain disruptions caused by the pandemic itself (and the potential for worsening ones as China continues a policy of aggressive quarantines), the problem isn’t so much that supply is lower (though it is in some critical areas) as that demand is dramatically higher because disposable incomes are artificially high. People have more dollars but a roughly similar amount of goods and services to spend them on. That bids up the cost of those scarce goods. It’s as close to an Econ 101 inflation scenario as you could possibly expect.
When the federal government pours additional dollars into the economy, that’s inflationary. When states do it, that’s also inflationary. Ironically, even as the extra money helps defray some of those higher grocery and gas bills, it further exacerbates the inflation it is intended to relieve.
States have some motivation to do this because the inflationary effect will be dispersed, with spillover effects into other states, while the benefit will be concentrated in-state. But one more temporary boost to disposable income is a very inefficient and counterproductive way of addressing the burdens of high inflation.
As relief goes, it is largely untargeted. Everyone is paying more due to higher prices, but if the goal is to provide aid to those struggling most, giving every adult filer $75 doesn’t prioritize aid to those forced to make difficult decisions under these higher costs of living. And as tax reductions go, this one-time transfer fails to achieve any meaningful economic benefit.
Revenue-negative tax reform also puts additional money in people’s pockets, but it does so while changing incentive structures. Well-structured tax relief reduces the cost of additional investment and increases the return to labor. It incentivizes work and investment and yields productivity gains. In other words, one-time checks give people more money to spend but no additional goods or services to spend them on, while improvements to the tax code return money to the private sector in ways that help close the gap between supply and demand.
Spending $181 million on $75 checks six months from now is an exercise in putting lipstick on a pig. If the goal is to help those most impacted by inflation, it is wasteful (most of the money does not go to those hurting the most) and inefficient (it exacerbates the underlying problem and makes no investment in economic improvement). Given Oklahoma’s budget surplus and projections of continued revenue growth, policymakers would be far better off eschewing gimmicky, ill-targeted rebate checks and instead investing in tax reforms that grow Oklahoma’s economy.
A modest, but permanent, income tax rate cut would be far preferable to one-time rebate checks, and Oklahoma could afford to implement such a cut. Even better, though, would be a policy change that yields additional economic benefit by promoting economic growth and eliminating deadweight losses. Franchise tax repeal could be fully funded for three years for the cost of sending out a single round of checks. And not only would the elimination of this antiquated tax get rid of a disincentive to investment in Oklahoma, but equally if not more importantly, it would eliminate significant compliance costs that are pure deadweight loss.
Both C and S corporations in Oklahoma pay a franchise tax levied on their business net worth. Many payers are small businesses, and they have to pay on the total accumulated wealth of their business, which includes the value of all physical components the firm uses to generate its goods and services, minus its debt. States have largely repealed such taxes because they apply even when a business doesn’t turn a profit (failing the “ability to pay” standard), because they penalize capital investment and—crucially—the cost of compliance is so onerous that for some businesses it rivals or even exceeds the amount of tax owed.
When a business pays taxes, it loses revenue, but the state gains it and puts it—hopefully—to other productive uses. There are good reasons to be concerned about taxes that are too high or economically distortionary, but the money doesn’t just go into a black hole. That’s pretty close to what happens with the franchise tax, however, with small businesses being forced to track the acquisition cost, age, condition, and depreciation of their equipment in order to remit the correct amount of tax. The time spent tracking the value of equipment is pure economic loss. It doesn’t produce anything. It does not fund government. It just costs businesses time and money.
If Sooner State policymakers want to use a portion of their higher revenues to make the economy work better for all Oklahomans, they should consider repealing the franchise tax, trimming the income tax, or both—paired, if desired, with targeted aid to those in the greatest need—not writing a single round of gimmicky checks.