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Did the 2017 Tax Reform Discriminate against Blue State Voters?

David Altig (), Alan Auerbach, Patrick Higgins (), Darryl Koehler (), Laurence Kotlikoff (), Ellyn Terry () and Victor Ye ()
Additional contact information
David Altig: Federal Reserve Bank of Atlanta
Patrick Higgins: Federal Reserve Bank of Atlanta
Darryl Koehler: Economic Security Planning Inc.
Laurence Kotlikoff: Boston University
Ellyn Terry: Federal Reserve Bank of Atlanta
Victor Ye: Boston University

No WP2020-001, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

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: fiscal policy; elections; Tax Cuts and Jobs Act; resource distribution; federal tax reform; state and local taxes; life cycle model (search for similar items in EconPapers)
JEL-codes: D15 D31 D72 E62 H20 H22 H71 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2019-04
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
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Journal Article: Did the 2017 Tax Reform Discriminate against Blue-State Voters? (2020) Downloads
Working Paper: Did the 2017 Tax Reform Discriminate against Blue State Voters? (2019) Downloads
Working Paper: Did the 2017 Tax Reform Discriminate against Blue State Voters? (2019) Downloads
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