Local Government Resilience to Federal Tax Reform: Evidence from the SALT Deduction Cap

Federico Corredor
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Federico Corredor: Public Finance Research Cluster, Andrew Young School of Policy Studies, Georgia State University

Center for State and Local Finance Working Paper Series from Andrew Young School of Policy Studies, Georgia State University

Abstract: The Tax Cuts and Jobs Act of 2017 capped the federal deduction for state and local taxes (SALT), increasing the tax price of local public services for high-income residents in high-tax jurisdictions. This paper examines the impact of this policy on local government finances, exploiting variation in exposure across counties based on average pre-reform SALT deductions. Counties most exposed to the cap did not reduce public expenditures, experience declines in own-source revenues, or shift toward non-deductible revenue sources. These findings challenge the view that federal deductibility is essential for sustaining local fiscal capacity and underscore both the central role of property taxation in local public finance and the resilience of subnational governments to federal tax policy shocks.

Pages: 45 pages
Date: 2026-02
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