Investor Alert

New York Markets Close in:

Aug. 19, 2022, 12:05 p.m. EDT

Indiana residents are due to receive checks up to $650 to help with inflation — and it’s not the only state giving residents direct payments

By Andrew Keshner

Indiana state officials confirmed this week that they are printing and mailing out checks that wrap together two different state-level refunds from excess money in government coffers.

The checks could come to $325 for individuals and $650 for married couples.

If residents opted for direct deposits when they were filing their taxes, they should have already received the $125 portion of the check, said State Auditor Tera Klutz. An additional $200 was authorized under a new law passed during a special legislature session last month.

“To those Hoosiers who have been patiently waiting for their check, I want to say – the wait is over! We have successfully printed the first round of checks, which eligible Hoosiers should start to receive this weekend,” Klutz said in a statement.

In the not-too-distant past, lawmakers viewed direct government payments as a way to help households shore up their finances against the pandemic’s impact.

Now, in a sign of the economy’s changing headwinds, direct checks are being billed as a way to soften inflation’s bite. But instead of the federal government issuing payments, a growing number of states are cutting checks made possible by budget surpluses.

Indiana is the latest state to join the ranks of more than 10 others that have authorized direct payments to residents.

Payments of up to $1,050 in California

California is another recent example. In the wake of a state budget agreement, an estimated 23 million Golden State residents will receive payments up to $1,050. Similar to the rules on the three federal Economic Impact Payments — better known as stimulus checks — the California inflation relief payments hinge on the amount of income and dependents in the household.

Californians with single annual incomes over $250,000, or reporting above $500,000 filing jointly as a couple, will not receive inflation relief checks. (Here’s information on who qualifies .)

Whatever the amount, recipients will certainly find ways to spend it in Indiana, California and elsewhere. For example, California has some of the most expensive gas in the nation even as prices fall , according to AAA . Californians paid an average $5.33 as of Friday, versus the $3.91 national average.

Last year, California joined Maryland and Idaho as the three states issuing direct payments based on extra budget cash, said Richard Auxier, senior policy associate at the Tax Policy Center. California and Maryland’s 2021 payments were aimed at lower-income households while Idaho’s payments were more across the board.

This year, California became the 15th state to green light payments, he said. The list includes: Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois and Maine. The payment timing, amounts and eligibility rules vary, Auxier said.

Indiana later joined the ranks of direct cash, and New Jersey has authorized a program using surpluses to defray property taxes and rental costs.

“The thing all these states have in common is they have surpluses and they are using part of the surplus to send checks. … As inflation has become a bigger and bigger issue, you have seen politicians frame them as inflation assistance,” Auxier said.

In July, inflation rates were somewhat tamer than expected by Wall Street analysts, but still high . Last month, the cost of living was unchanged month to month, but had climbed 8.5% from the same point last year, with groceries making the largest yearly increase since March 1979.

The payments are separate from other types of relief lawmakers are eyeing and sometimes enacting, including pauses to state-level gasoline taxes. President Joe Biden wanted a three-month halt on the 18.4-cent federal gas tax too. That has not materialized.

Announcing the budget deal, California Governor Gavin Newsom, a Democrat, and the state’s political leaders said the “centerpiece” was its $17 billion “inflation relief package,” which will fund the direct payments. The spending plan “prioritizes getting dollars back into the pockets of millions of Californians who are grappling with global inflation and rising prices of everything from gas to groceries,” they said.

States can afford to be generous thanks to several factors, Auxier explained. By 2019, state balance sheets had moved beyond the Great Recession’s toll, but then came the pandemic’s early 2020 shockwave. Jobless claims soared while sales tax revenue dropped.

Next came “the massive response from the federal government,” in the form of three rounds of stimulus checks to residents, extra unemployment insurance, monthly advances on the child tax credit and extra funding to state governments.

As higher-earning households generally fared better in lockdowns favoring remote work, they held onto their jobs — and were able pay higher tax rates.

“You had this whiplash: Things are incredibly bad to actually, nope they are way better than anyone possibly anticipated,” Auxier said.

Which other states will hand out cash payments?

Considering the budgeting schedules of many states, most that are going to authorize payments have already done so by now, Auxier said.

In New Jersey, lawmakers must have a new budget in place by July 1, said Micah Rasmussen, director of Rider University’s Rebovich Institute for New Jersey Politics.

That new budget passed , with a $2 billion program that will have $1,000 or $1,500 credited against homeowners’ property tax bills, depending on income. It will also send $450 direct checks to renters, Rasmussen said. The program that New Jersey’s Democratic governor, Phil Murphy, signed into law would roll out over several years.

State Republicans wanted direct payments on a broader scale, dubbing it their “Give it Back” plan.

“In New Jersey, we have a very strong, longstanding aversion to the property tax,” Rasmussen noted. It’s inflation that’s given lawmakers the “urgency” to earmark the money this way.

In Indiana, Gov. Eric Holcomb, a Republican, called for a special session of the legislature last month. There were two very visible parts of the agenda: the future of the state’s abortion laws after the Supreme Court overturned a woman’s constitutional right to an abortion under the 1973 decision Roe v. Wade. That culminated in a near-total ban in the state effective Sept. 15, which the governor quickly signed.

There was also the question of more direct cash to residents.

Indiana’s budget laws are already designed to send tax rebate money back to households when there’s a certain amount of surplus, Kyle Anderson, an economist at Indiana University’s Kelley School of Business, explained in an interview before the state started churning out the new rounds of checks. Even ahead of the state legislature’s special session to authorize the extra cash, Anderson said it was “very likely to pass.”

But can ‘inflation checks’ make inflation worse?

Lawmakers want to ease the price pinch when people buy groceries, or fill up at the gas station. But is the solution just going drive up demand and make inflation worse?

It’s worth proceeding with caution, said Ben Gitis, associate director of the Bipartisan Policy Center’s Economic Policy Project.

Direct checks from state budget surpluses are “not a big step in the wrong direction, but it is a step in the wrong direction in terms of tackling the underlying problems,” Gitis said.  

Spending on workforce development to address tight labor supply or other initiatives to ease supply chain woes could better target the root causes of higher prices, he said. “But if you are spending on something directly meant to support household spending, that’s where I think you run into some of the problems.”

In theory, Auxier and Anderson both see how that argument could apply. But in reality, given the relatively small amounts of cash, both doubt the inflation relief checks would make matters worse.

Besides, Anderson noted, if states like Indiana put the money towards public spending projects instead of direct payments, that could potentially drive up costs too.

Auxier’s real concern is the 10 states that recently slashed their income tax rates in light of ample surpluses. Recession worries keep coming. If the economy deteriorates, Auxier said those states would have “real problems because they fundamentally changed their ability to collect tax revenue.”

This story was updated on August 19.

Link to MarketWatch's Slice.