State solutions to help Americans cope with inflation

By Michael Lucci, Senior Policy Advisor at State Policy Network

Inflation is hurting American families, especially those with lower incomes. The costs of basic goods such as gas, food, and rent continue to rise at rates not seen since 1980. In fact, inflation is so high that it’s likely to be the top issue ahead of the 2022 midterm elections.

Americans are eager for relief and understandably look to leaders in Washington, DC, to get inflation under control. After all, Washington bears much of the responsibility for the highest inflation in more than 40 years. DC’s massive overspending is a primary driver of today’s record inflation. Solving this problem will ultimately lie with the federal government. However, there are steps states can take to help Americans cope with record prices.

The solutions below come from SPN’s Network of state policy organizations who work each day to improve the lives of the people in their communities.

1. Cut taxes

Cutting taxes will allow American families to keep more of their paycheck—a solution which can bring peace of mind to many families as the cost of living increases.

States have the fiscal bandwidth to cut taxes to return more dollars to their citizens specifically because they keep their fiscal houses in order. The federal government causes inflation because it deficit-spends and prints money to make up the difference, which is where the inflation comes from—the federal government not keeping its fiscal house in order. Cutting state taxes will give residents more dollars, and thus more purchasing power to buttress against the loss of value of each dollar.

State governments should also index state tax brackets, deductions, and exemptions to adjust for inflation so that the value of these tax reductions is not eroded by inflation. For example, if you have a $10,000 standard deduction, that deduction should go up to $10,800 after a year of eight percent inflation.

Tax reform is even bigger opportunity for states because many of them are experiencing a budget surplus due to surging tax revenue and state savings along with previous federal government legislation that distributed billions in COVID-19 relief funding. The financial cushion gives states flexibility to give Americans more tax relief without compromising essential public services.

Empower Mississippi added: “While federal policymakers may have let the proverbial cat out of the bag, state policymakers can help ease the pain. Mississippi is sitting on billions in COVID money, in addition to nearly a billion in surplus tax revenue collected in the last fiscal year. Surplus revenue can provide a cushion to reduce the tax burden on working families, through the elimination of the income tax, while ensuring that core government services are sustained.”

The Oklahoma Council of Public Affairs noted: “What’s needed are structural changes to the tax code. Broad-based reforms that aim to grow the economy by growing the workforce and spurring new investment will be the best way to combat inflation.”

States might also suspend the gas tax to temporarily help Americans cope with the highest gas prices on record.

The Garden State Initiative observed: “While gas taxes are less than 1% of the revenue collected by the state [New Jersey], a suspension can make a tangible difference in the lives of New Jersey families. For example, our analysis determined that a Hunterdon County family could save $150 a month, while an Atlantic County family could save more than $110 a month.” Though as Tax Foundation points out, there are unique trade-offs to consider in suspending the gas tax.

States that are cutting taxes to give Americans relief:

Thanks to Empower Mississippi and the Mississippi Public Policy Foundation, Mississippi lawmakers passed the largest tax cut in the state’s history.
Iowans for Tax Relief Foundation helped Iowa pass historic tax reform.
Kansas enacted property tax reform.
Georgia adopted a flat tax.
Utah passed a law that creates a property tax deferment program for older Utahns.
Thanks to the efforts of the Goldwater Institute, a judge halted Prop 208, which would have raised income taxes in Arizona.
In a victory for tax fairness in Washington, the Douglas County Superior Court Judge struck down the capital gains income tax passed by the Washington State Legislature in 2021. The ruling was a resounding victory for the Freedom Foundation—which filed the first lawsuit challenging the tax.

A new SPN State Voices poll finds a majority of Americans think tax relief would be beneficial to their financial situation:

And Americans are willing to move from high-tax states to low-tax ones. A report by the Tax Foundation found Americans moved to low-tax states in 2021:

2. Reduce regulations

States can also fight inflation by reducing regulations to keep down the cost of doing business. Small businesses create jobs for the people in their community and grow the economy. But so often business owners can’t deal with onerous regulations that drive up the cost of doing business. Eliminating or minimizing regulations will drive economic growth and reduce costs on entrepreneurs, workers, and consumers.

Some states are adopting an innovative policy called regulatory sandboxes—a legal classification that creates a space where participating businesses won’t be subject to onerous regulations, usually for a limited amount of time. Regulatory sandboxes allow new businesses to develop more easily—which can create jobs and opportunities for communities.

There is a wide range of regulatory policies that impact the availability of labor, including licensing requirements and forced-unionization regimes, that restrict the supply and flexibility of the labor pool. These are discussed below.

States advancing regulation reforms:

The Buckeye Institute helped Ohio pass a bill that requires government officials to eliminate some of the more than 270,000 government regulations that keep Ohioans from starting and expanding businesses, and will make it easier for Ohioans to start new careers—all while still protecting the health and safety of Ohio’s citizens.

3. Increase the housing supply

Housing has seen major price inflation, and homes are becoming unaffordable for many middle-class and low-income families. States and local governments can adopt policies to make it easier add home options to the much-needed housing supply—and help keep housing costs under control for American families. These ideas include reforming zoning rules to make land more available, allowing more housing density in highly-attractive areas, reducing regulations that block the development of new homes, speeding up permit approvals, and removing minimum lot requirements, among other reforms.

4. Help get people back to work

The labor shortage is driving some of the record inflation we’re seeing today. Helping Americans get back to work is one of the best policy priorities states can embrace.

In a report on inflation, the Foundation for Government Accountability pointed out how states can bolster their workforce and keep workers’ incentives aligned with economic conditions by indexing unemployment benefits to economic conditions, expanding unemployment work search requirements, and opting out of federal Medicaid restrictions that are keeping more Americans on welfare.

FGA added: “Policymakers have options at their disposal to fill the void in leadership by eliminating harmful policies that have caused America’s labor force to contract. Now, the promise of ending runaway inflation is in the hands of state leaders who have the power to rejuvenate the American labor force.”

States can also reform burdensome occupational licensing laws to make it easier for workers, especially those with lower incomes, to find employment. An occupational license is a permission slip from the government that allows someone to work in a certain field. Many states have onerous licensing laws that make it difficult for people to find work.

Inflation is another opportunity for state solutions to create national impact

Inflation is a big issue, and it’s not one that individual states can solve on their own. However, the good news is that states don’t have to wait on Washington, DC, to start delivering relief. States have options to make policy changes that will support their communities’ unique needs through challenging economic times. When states seize these opportunities, national impact can come from the groundswell of state and local solutions being implemented across the country.