Budget & Tax

Curtis Shelton | June 3, 2022

Provide tax cuts (not rebates) to combat inflation

Curtis Shelton

After Gov. Kevin Stitt’s veto of parts of the state budget and call for a special session to consider tax relief, much discussion has centered on the best way for the Oklahoma state government to deal with inflation.

Inflation, as everyone is painfully aware, is the increase in prices and is generally caused by an increase in demand and/or a decrease in supply. That seems simple, but the difficult part comes in trying to determine which variable is the dominant one when it comes to price increases. Despite attempts to single out one overarching policy for the rise in inflation, the truth is that numerous factors have contributed.

Covid-19 and the ensuing shutdowns caused severe supply-chain disruptions that are still being dealt with. The stimulus checks sent by Presidents Trump and Biden added to the money supply while many households were saving at record-high levels. This helped spur a huge uptick in demand once the economy began to reopen. Moreover, consumer spending has grown by nearly 30 percent since the second quarter of 2020. The ongoing war in Ukraine has added even more disruption to the global economy.

In sum, we have a global pandemic, federal policy decisions, and international military conflicts all affecting the price of goods. Is it really feasible that the Oklahoma state government can provide real relief for consumers?

There are only two ways to reduce inflation: reduce the demand for goods and/or ratchet up supply. In other words, you need a more productive economy creating more goods faster, or a shrinking economy with people spending less and making less. Clearly, one of those two options is preferable.

The $75 rebate proposed by the Oklahoma Legislature does nothing to address either of those two issues. Granted, there is an important distinction between the federal stimulus and an Oklahoma tax rebate: the federal government can print money and incur deficits, whereas Oklahoma’s state government cannot. This means that those rebate checks would not artificially increase the money supply like the federal stimulus will. However, a $75 rebate will only pay for, frankly, not much.

By contrast, tax relief in the form of an income-tax cut can provide long-term relief for taxpayers while also spurring economic growth. The evidence of growth in no-income tax states is overwhelming and research has shown that a reduction in income tax rates results in economic growth.

Would income-tax cuts be a guarantee to curb inflation for Oklahomans? No, but they would at least address some of the underlying causes of price increases. Global forces will always be at play for Oklahoma’s economy, but lawmakers can do more to give their constituents a more stable footing to withstand these global shocks.

Curtis Shelton Policy Research Fellow

Curtis Shelton

Policy Research Fellow

Curtis Shelton currently serves as a policy research fellow for OCPA with a focus on fiscal policy. Curtis graduated Oklahoma State University in 2016 with a Bachelors of Arts in Finance. Previously, he served as a summer intern at OCPA and spent time as a staff accountant for Sutherland Global Services.

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