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Inflation + taxes + politics = confusion

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Photo by Anna Shvets from Pexels

Inflation is the biggest domestic, and political, concern right now. And after months of waiting, the Federal Reserve's expected reaction to rising prices came last week.

The board members of the United States' central bank raised interest rates on Wednesday, March 16, for the first time since 2018. The bump of a quarter percentage point to its benchmark rate is the first of expected increases to combat the country's highest inflation in four decades.

When all is said and done, most financial observers say the previously near-zero interest rates to be near 2 percent by the end of the year.

State tax moves to combat inflation: But the Fed is not alone in looking for ways to tame inflation. Many state leaders are examining tax tweaks to fight the rising costs of living.

Some of those actions, and reaction to them, get this weekend's Saturday Shout Outs.

Since food and fuel prices are prompting the most complaints by consumers, the first two shouts go out to the following articles on those costs.

  • As Inflation Drives Up Prices, State Lawmakers Eye Cutting Food and Sales Taxes — Liz Farmer, in a piece for Route Fifty, notes, "While income tax cuts are a perennial feature in state legislatures, there is considerable buzz around easing the cost of goods as inflation pushes up household expenses. Sales tax cuts are up for consideration in at least five states and lawmakers in a few states are also pushing gas tax cuts."
  • Gas taxes get rolled back as pump prices soar — "Several states have taken steps to temporarily roll back their gasoline taxes, a move the Biden administration is considering backing on the federal level as the cost of fuel has surged past $4 a gallon," write Keith Laing, Ari Natter, and Jennifer A. Dlouhy in their Accounting Today article.

Will this help? Maybe. Is good tax policy? Maybe not.

That brings us to the weekend's third shout out, Howard Gleckman's analysis at TaxVox, the blog of the Tax Policy Center. Gleckman, senior fellow at the joint venture of the Urban Institute and Brookings Institution, warns in his Note To Governors: Cutting Taxes Will Make Inflation Worse, Not Better.

"Truth is, elected officials can't do much to slow inflation," writes Gleckman. "The Fed can address the problem by raising interest rates, as it will start doing this week. But the best lawmakers can do is not make the problem worse by throwing more money at consumers, either in the form of tax cuts or new spending."

Votes vs. wise tax policy: Of course, good tax policy often isn't at the top of politicians' minds. They're as concerned — OK, more concerned and, respectively, most concerned — about public perception and voter approval.

And folks will welcome in the short term the few cents they'll save in this time of rising prices.

The longer-term question is will they'll be as thankful at election time a few months down the road?

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