Could Minnesota's proposed rebate checks fuel even higher inflation?

In debates at the state Capitol about proposed rebate checks for Minnesotans, the talking points are mostly around using them to help residents cope with high inflation.

But could the infusion of cash in people's bank accounts also make inflation worse, or at least, a little harder to bring back down?

Gov. Tim Walz and state lawmakers pushing for the tax rebates don't think so, saying the checks would be insignificant compared to the global and national forces that have been making goods and services more expensive throughout the last couple years.

But it's a question that's been on the mind of some economists. One state on its own issuing rebate checks probably won't make much of a difference.

But with many states cutting rebate checks in 2022 and more, like Minnesota, thinking about joining them this year, some experts say it could add up to have a more noticeable impact.

Federal Reserve Bank of Minneapolis President Neel Kashkari has said it has given him pause as states in the region, including Minnesota, consider using a portion of their significant budget surpluses to distribute rebate checks to residents.

"As a taxpayer, that sounds pretty good to me," he said earlier this month at an event in Sioux Falls, S.D. "But as a monetary policy maker, that sounds like more stimulus. And that's putting more money in people's pockets to go out and spend on airplane tickets and food and buying things."

It also means people might take more time before re-entering the job market, he said at the Boston Economic Club last month.

"On the margin, it's probably a little bit inflationary and makes our jobs, on the margin, a little bit harder," Kashkari said.

Wendy Edelberg, an economist with the Washington-based Brookings Institution, said there's no question state tax rebates are inflationary to some extent.

"You can think about whether or not they have big or moderate or small increases on inflation," she said. "But we do know that they go in the direction of boosting inflation."

That could be a reasonable tradeoff for policymakers in order to help lower-income residents who are struggling more to afford higher prices for food and rent, she said. But she also noted that lawmakers have not targeted many of these state programs narrowly, instead often making them fairly broad or without income limits.

Rebate checks, tax cuts and other fiscal policies across the country are one reason the Fed's interest rate hikes haven't curbed consumer spending more and, by extension, inflation, said Louis Johnston, an economics professor at the College of St. Benedict and St. John's University.

"It's keeping inflation from falling as much as you otherwise would expect," he said.

The latest U.S. consumer-price index released this week showed the jump in consumer prices has been moderating, rising 6% on a year-over-year basis in February and down from 6.4% in January and the recent peak of 9.1% last summer. But it's still much higher than the Fed's 2% target.

The Fed will announce Wednesday whether it will further raise rates in its fight against inflation. At the same time, it now also has another wrinkle — recent turmoil in the banking sector — to consider as well.

When U.S. inflation surged to the highest level in four decades last year, economists offered many explanations. For one, they noted COVID-related lockdowns led to supply chain bottlenecks that hampered some products' availability. The war in Ukraine exacerbated some of those issues.

At the same time, consumer demand came roaring back as Americans, flush with savings, started spending more and shifting their purchases away from services to goods.

While divided on how big a role it played in driving up inflation, many also pointed to President Biden's $1.9 trillion American Rescue Plan as a contributing factor in fueling more demand. The federal legislation, passed in March 2021, included $1,400 checks for many Americans, enhanced jobless benefits and billions in aid to state and local governments.

While that extra fiscal support from the federal government has since subsided, state governments have been doing more.

Facing big budget surpluses, more than 20 states passed some sort of tax rebates last year, often billing them as inflation relief checks. They ranged in size, such as $1,050 in California, $750 to $1,500 in Colorado and $250 to $500 in Georgia.

The governor of Montana signed two bills last week that included tax rebates of up to $1,250 per taxpayer or $2,500 for joint filers, as well as up to $1,000 in a property tax rebates for residents.

In Minnesota, Walz's initial efforts last year to grant tax rebates did not gain much traction. This year, he proposed a scaled-back version that calls for $1,000 to $2,000 checks, with income limits of up to $75,000 for single filers and $150,000 for couples. Families could also take $200 for each dependent, up to three children.

After criticizing Walz's plan last year, Republican legislators are now on board with tax rebates and want them coupled with permanent tax cuts. They recently laid out an even more generous plan, calling for rebate checks of $1,250 to $2,500 with no income limits.

A spokeswoman for Walz's office said the administration does not believe his rebate check proposal will contribute to inflation.

"While major events — whether the war in Ukraine or global inflation — are taking a bite out of Minnesotans' pocketbooks, we have a historic surplus that can help Minnesotans navigate rising prices," Walz said in a statement. "Our budget will fight inflation by giving money back to Minnesotans in the short term, while lowering costs for things like child care in the long run."

State spending on rebate checks would have to be astronomical — tens of billions of dollars — to impact inflation, said Rep. Pat Garofalo, R-Farmington. The GOP lead on the House Ways and Means Committee noted the recent state budget forecast showed consumers increasingly are reliant on credit to cover their purchases and predicted many Minnesotans would use the checks to pay off debt.

Minnesota Management and Budget Commissioner Jim Schowalter said the amount of financial relief the state is considering is minute compared to other factors driving inflation.

"The state is likely to invest its revenues into Minnesota's economy regardless how the legislature decides to spend it," he said in a statement. "So it's really just a question of where and how it is invested."

V.V. Chari, an economics professor at the University of Minnesota, said if there is an inflationary impact from state rebate checks, it is likely to be quite small, especially because states must have balanced budgets and cannot issue new debt like the federal government can.

"At the end of the day, inflation is something that must, as a quantitative matter, lay squarely at the feet of the Fed," he said.