State and Local Fiscal Responses to the Tax Cuts and Jobs Act of 2017

• In Event: Determinants of State and Local Fiscal Policy

Abstract

The Tax Cuts and Jobs Act of 2017 significantly limited the federal deductibility of state and local taxes (SALT), both by placing a cap on the amount of SALT that could be deducted and by increasing the standard deduction. This study examines the effects these changes on local and state government fiscal behavior. Using data from the IRS population files of individual income tax returns spanning 2014-2022, we calculate county and state-level after-tax cost of paying SALT before and after the implementation of TCJA. This data is then matched to data on state and local revenue and expenditures from the State and Local Finance data collected by the U.S. Census Bureau, as well as data on state sales and income tax rates collected by the Tax Foundation. Following the previous literature, we estimate the impacts of changes in the after-tax cost of SALT on tax revenue, tax parameters, and state and local expenditures using two way fixed effects models in which we instrument for the endogeneity of the after-tax cost.

Authors

• Bradley T. Heim, University of Central Florida

• Marc Plooster, Indiana University Bloomington

• Lady Ikeya, Indiana University

• Andrey Yushkov, University of Illinois Chicago

• Maggie (Yuanyuan) Liu, US Department of Treasury