Governors Cannot Stop Inflation, But Tax And Regulatory Reform Will Boost Their States’ Economies

Inflation is hot, hot, hot. The Consumer Price Index (CPI) was up 7.5% over the last year, the highest one-year jump since the early 1980s. Governors around the country are throwing out ideas to try to provide voters some relief, including one-time $500 checks and eliminating grocery taxes. These efforts are well-meaning, but they will not curb inflation. Instead of engaging in gimmicks, states should use this opportunity to enact real tax and regulatory reforms that will strengthen their economies for decades.

Many prognosticators thought inflation would be transitory, but now it seems entrenched. In addition to the CPI’s meteoric rise, the Producer Price Index (PPI), which measures wholesale prices, was up 9.7% over the last 12 months. Producers cannot absorb higher costs forever, so the big increase in the PPI signals further consumer price increases down the road. As Smashburger president Carl Bachmann recently noted, inflation is a challenge for restaurants and some cost increases are already being passed to consumers.

Inflation is also a political nightmare. People notice and hate high prices, especially when their wages do not keep up. Real average hourly earnings declined by 1.7% from January 2021 to January 2022 as inflation eliminated any raises people received due to the tight labor market. The Biden administration does not seem to have a plan to calm voters, so governors are scrambling to respond on their own.

Governor Brian Kemp of Georgia proposed giving residents tax credits ranging from $250 to $500. Governor Laura Kelly of Kansas is considering $250 taxpayer rebates and eliminating the state’s grocery tax to save people money. Governor J.B. Pritzker of Illinois also wants to eliminate the state’s sales tax on groceries, as well as freeze the state’s gas tax. Other governors are proposing similar temporary measures to soothe frustrated voters.

Instead of temporary or narrow tax changes that will provide negligible relief, governors should focus their efforts on fundamental changes that will strengthen their economies for years to come.

Take Arkansas. Arkansas governor Asa Hutchinson recently announced a 2% pay increase for the state’s executive branch employees to provide some inflation relief. This is welcome news for those employees but does little for the rest of the state’s residents.

Pro-growth tax reform, however, will benefit everyone in the state, both by keeping more money in taxpayers’ pockets and by boosting economic growth. And since inflation is the result of too much money chasing too few goods, more production and economic growth can also combat inflation in the long run. Some Arkansas officials are already exploring ways to reduce the state’s income tax rates and potentially eliminate the income tax altogether. Focusing on these broad tax reforms is a better use of time than trying to pass temporary changes.

Wisconsin is another example. Governor Tony Evers recently proposed to give every Wisconsinite a $150 tax rebate, in part to provide inflation relief. It is a nice gesture, but a single $150 rebate will do little to help the average consumer who is spending an extra $276 per month due to higher prices.

Instead of a one-time rebate, Governor Evers could embrace pro-growth tax reform. A recent analysis from economist Noah Williams of the Center for Research on the Wisconsin Economy finds that eliminating the state’s income tax while slightly increasing the state’s sales tax would boost state output by 7.9% and employment by 6.9%.

Research also shows that tax cuts spur innovation. A 10% increase in personal income taxes reduces the quantity and quality of patents by 6% and 8%, respectively. States that lower taxes relative to other states also attract more inventors.

Unlike a one-time check, tax reform will create a stronger, more innovative economy that will help all Wisconsinites for years to come.

Tax reform is not the only way states can combat inflation and boost their economies. Too much regulation also raises costs for consumers and slows job growth. A series of studies find that regulation increases prices, worsens poverty, and exacerbates income inequality.

As mentioned previously, Governor Kelly of Kansas wants to eliminate the state’s grocery tax to help people cope with inflation. Doing so would provide some temporary relief, but in the long run Kansas’s economy would be no better off.

Instead of a temporary tax cut, Governor Kelly could support widespread regulatory relief as a way to lower prices and expand economic opportunity. A recent study from the Mercatus Center at George Mason University outlines eight steps Kansas could take to streamline its 72,645 regulatory restrictions, including adopting sunset provisions, offsetting new regulations by cutting outdated ones, and strengthening the economic analysis of regulations to ensure the benefits of regulations outweigh the costs.

If Kansas reformed its regulatory environment, it would cut costs for consumers and expand opportunities for entrepreneurs, both today and long after inflation has passed.

States such as Florida, Texas, and Utah are showing the rest of the country what strong, dynamic economies look like. These three states have low taxes, relatively few land-use regulations so housing prices are reasonable, and they enable experimentation via policies like regulatory sandboxes. Governors that create similar environments in their states will generate enduring economic prosperity.

It is understandable that governors want to provide their constituents some relief from inflation. Higher prices put pressure on people’s budgets today and make them anxious about the future. Temporary tax credits or cuts seem like a simple way to provide aid, but ultimately their impact will be modest. Structural reforms that increase the incentive to work and expand opportunity are the best way to achieve lasting economic success. States that can resist the current urge to tinker around the edges and instead focus on structural reforms will have a long-term economic advantage.