State Tax Cut Policies Prop Up Income, Fanning Inflation Worries

WASHINGTON — For months, economists have warned that efforts by states to buffer their constituents from rising prices with tax rebates and stimulus checks might, paradoxically, make inflation worse by giving consumers more money to spend.

New income data released Thursday suggests that the state help is, in fact, making a difference to consumers by notably boosting their incomes. That could fan price increases going forward if it helps to fuel continued solid spending.

According to the report, personal income climbed by 0.7 percent in October, notably more than the 0.4 percent the previous month, partly because of increases in government social benefits that “primarily” reflected “one-time refundable tax credits issued by states,” the report said.

Solid income gains — which are also being fueled by higher wages and salaries — could give consumers more confidence to keep opening their wallets as they head into the holiday season. That could in turn give companies the ability to continue charging more for goods and services at a time when inflation is proving stubbornly rapid.

Prices as measured by the Personal Consumption Expenditures index rose by 6 percent in the year through October, according to a report from the Commerce Department. That was a slower increase than in the month before, but inflation remains three times the Federal Reserve’s target despite hopeful recent signs that it is beginning to moderate.

How much state help will fuel consumption — and future price increases — is an open question.

Tracking the value of refundable tax credits provided by the states can be complicated. The Commerce Department’s Bureau of Economic Analysis said that it relied on media reports and “state-level administrative data” to estimate the value of these one-time tax credits that were granted this year.

As part of the $1.9 trillion American Rescue Plan that Democrats in Congress passed last year, states, counties and cities were granted $350 billion in stimulus money. Although the law restricted states from using the funds to subsidize tax cuts, the courts have blocked that requirement and many state lawmakers — Republicans and Democrats — have opted to use budget surpluses to cut taxes or grant tax credits.

Economists have been fearful that additional stimulus funds will fan inflation by giving people more money to spend and enabling them to bid up prices for goods and services. Since states have enacted different policies at different times throughout the past year, it is hard to pinpoint the precise impact that local relief efforts are having on the national economy.

Through mid-July, 10 states had enacted individual income tax rate cuts, six states had passed corporate income tax rate reductions, five states suspended their gasoline taxes, and two states exempted groceries from sales taxes, according to the Tax Foundation. Direct tax rebates were also popular, with 11 states returning surplus revenue to taxpayers.

Additional tax cuts are in the works in the states, despite concerns that inflation could remain high.

Gov. Glenn Youngkin, Republican of Virginia, said last week that he intended to pursue tax cuts in his budget proposal next year.

This week, Gov. Ned Lamont of Connecticut, a Democrat, signed legislation to extend gas tax cuts and pandemic premium pay.

“We’re extending the gas tax holiday a little bit longer, providing energy assistance for those in need and increasing the amount of funding available for the pandemic pay program for the essential workers who’ve showed up to work every day throughout the pandemic,” Mr. Lamont said in a statement. “During the upcoming regular session, it is my goal to continue advancing more policy changes like these that will make a difference in the lives of the people who live here.”