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Democrats have come out in droves since the passage of the CARES Act calling for a second round of direct stimulus payments to Americans. Earlier this week, the House of Representatives unveiled a new relief proposal, the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act), that included an additional $1,200 stimulus check per qualifying individual and up to $6,000 per household. Republicans, meanwhile, have demurred, worried about the increasing cost of stimulus relief; of the HEROES Act passed by the House, Senate Majority Leader Mitch McConnell declared it “dead on arrival” in the Senate.
Don’t Give Every American A Stimulus Check Of Equal Face Value:
Here is a provocative proposal to decrease the cost of stimulus payments to taxpayers. The key insight is that geography can transform the true value of a stimulus check. Congress could harness geographic purchasing variances to lower the overall cost of relief. How? By equalizing the real impact of payments, not the nominal dollar amount of the checks. In other words, don’t give every qualifying American a stimulus check of equal face value.
Focus On Real Impact, Not Nominal Amounts:
The $2 trillion CARES Act passed by Congress in March provided $1,200 stimulus checks to individuals, $2,400 to those filing jointly, and $500 for qualifying dependent children. The recently unveiled HEROES Act proposal double down with additional $1,200 checks, up to $6,000 per household.While qualification depends on tax filing status, income, and dependent children, there is geographic uniformity.
However, a dollar in Mississippi goes a lot further than a dollar in Hawaii, which means residents in certain states received a stimulus check that stretched much further than residents in other states. Simply put, how much your check is actually worth depends largely on where you live.
Leverage Regional Price Parity Data:
The Bureau of Economic Analysis, which is part of the U.S. Department of Commerce, publishes a regional price parity index that “allows comparisons of buying power across the 50 states.” The index can be used to quantify how far stimulus checks stretch in each state.
In simple terms, the higher the price parity figure for a given state, the more residents pay for housing, utilities, groceries, and transportation. Let’s take the two ends of the latest regional price parity data, Hawaii and Mississippi. Hawaii’s price parity index of 118.5 means that purchasing items costs 18.5 percent more than the national average. Goods in Mississippi, with a price parity of 85.7, cost roughly 14 percent less than the national average.
Applied to stimulus checks, this means that a $1,200 stimulus check provides Hawaiians with only $1,013 in real purchasing power, while it gives Mississippians $1,400 in purchasing power.
Reduce The Cost Of Future Of Stimulus Checks:
To reduce the amount needed for a hypothetical second round of stimulus checks, Congress could vary the face value of stimulus checks sent to residents in different states, while maintaining purchasing power for all qualifying Americans by leveraging regional price parity.
For example, if Congress wanted to ensure parity for individuals filing as single in Hawaii and Mississippi, it could give a $1,200 check to Hawaiians and $868 to Mississippians. While the check amounts would have different face values, both would have the same purchasing power in terms of paying for housing, food, utilities, and transportation; of course, it could also achieve purchase equity by giving Mississippians a $1,200 check and then augmenting Hawaiians’ checks to be $1,422, but this would end up costing the government more.
The table below illustrates what would happen if we used the latest IRS state-by-state payment dat, which broke down the average stimulus payment sent to residents in each state, and indexed based on Hawaii’s average payment amount of $1,703; in other words, it shows what would happen if we equalized Hawaii’s nominal and real payment. All states would see their indexed average payment amount decrease, since they have a lower regional price parity than Hawaii’s. For example, Michigan has a regional price parity of 93, compared to Hawaii’s 118.5, and its residents had received a nominal $1,726 average payout. If we were to normalize the payment, Michigan residents would receive, on average, $1,355. That $1,355 would be able to buy the same basket of goods as the $1,703 check that Hawaiians received.
Congress could lower the cost of direct stimulus payments by over $35 billion dollars by focusing on … [+]
Copyright: Shahar Ziv
How Much Would This Proposal Save?
126 million payments totaling over $215 billion have been paid out by the IRS. If payments had been normalized based on my proposal, the same 126 million disbursements would only have totaled $180 billion. In other words, Congress could achieve equality in the impact of stimulus relief and save over $35 billion.
There are many approaches to distributing relief aid and the above proposal is simply meant to push the thinking in terms of potential options. Politicians and policy experts would need to weigh in on what is optimal and on what we are optimizing. For example, Congress could choose a more equitable distribution of the same overall amount of aid, $215 billion, but base it on purchasing power.
While this proposal would save billions, it would need to be politically viable. Would senators and representatives in low cost of living states be willing to vote for a bill that remits smaller checks to their constituents on the basic of purchase parity? Probably not; however, everyone should recognize that while current allocation mechanism may appear equal on the surface, it has its own inequities built in.