Working Paper: NBER ID: w25770
Authors: David Altig; Alan J. Auerbach; Patrick C. Higgins; Darryl R. Koehler; Laurence J. Kotlikoff; Michael Leiseca; Ellyn Terry; Yifan Ye
Abstract: The Tax Cut and Jobs Act of 2017 (TCJA) made significant changes to corporate and personal federal income taxation, including limiting the SALT (state and local property, income and sales taxes) deductibility to $10,000. States with high SALT tend to vote Democratic. This paper estimates the differential effect of the TCJA on red- and blue-state taxpayers and investigates the importance of the SALT limitation to this differential. We calculate the effect of permanent implementation of the TCJA on households using The Fiscal Analyzer: a life-cycle, consumption-smoothing program incorporating all major federal and state fiscal policies. We find that the average percentage increase in remaining lifetime spending under the TCJA is 1.6 percent in red states versus 1.3 percent in blue states. Among the richest 10 percent of households, this differential is larger. Rich households in red states enjoyed a 2.0 percent increase compared to a 1.2 percent increase among the rich in blue-state households. This gap is driven almost entirely by the limitation on the SALT deduction. Excluding the SALT limitation from the TCJA results in a spending gain of 2.6 percent for rich red-state households compared to 2.7 percent for rich blue-state households.
Keywords: Tax Reform; SALT Deduction; Political Economy; Taxpayer Behavior
JEL Codes: D15; D31; D72; E62; H20; H22; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TCJA (K34) | remaining lifetime spending (red state households) (H75) |
| TCJA (K34) | remaining lifetime spending (blue state households) (H75) |
| SALT deduction limitation (H20) | remaining lifetime spending (red state households) (H75) |
| SALT deduction limitation (H20) | remaining lifetime spending (blue state households) (H75) |
| SALT deduction limitation (H20) | remaining lifetime spending (wealthiest 10% in red states) (H75) |
| SALT deduction limitation (H20) | remaining lifetime spending (wealthiest 10% in blue states) (H75) |
| SALT deduction exclusion (H20) | remaining lifetime spending (rich red state households) (D15) |
| SALT deduction exclusion (H20) | remaining lifetime spending (rich blue state households) (D15) |