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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Did the 2017 Tax Reform Discriminate against Blue State Voters?
David E. Altig
Alan J. Auerbach
Patrick C. Higgins
Darryl Koehler
Laurence J. Kotlikoff
Michael Leiseca
Ellie Terry
Victor 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.


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David E. Altig & Alan J. Auerbach & Patrick C. Higgins & Darryl Koehler & Laurence J. Kotlikoff & Michael Leiseca & Ellie Terry & Victor Ye, Did the 2017 Tax Reform Discriminate against Blue State Voters?, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2019-7, 01 Apr 2019.
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Keywords: fiscal policy; elections; Tax Cuts and Jobs Act; resource distribution; federal tax reform; state and local taxes; life cycle model
DOI: 10.29338/wp2019-07
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