Did the 2017 Tax Reform Discriminate Against Blue State Voters?

26 Pages Posted: 24 Apr 2019

See all articles by David Altig

David Altig

Federal Reserve Banks - Federal Reserve Bank of Atlanta; Federal Reserve Bank of Cleveland; University of Chicago - Booth School of Business

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Patrick C. Higgins

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Darryl Koehler

Economic Security Planning

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Michael Leiseca

Economic Security Planning

Ellie Terry

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Yifan Ye

Boston University

Multiple version iconThere are 3 versions of this paper

Date Written: 2019-04-01

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

JEL Classification: D15, D31, D72, E62, H20, H22, H71

Suggested Citation

Altig, David and Auerbach, Alan Jeffrey and Higgins, Patrick C. and Koehler, Darryl and Kotlikoff, Laurence J. and Leiseca, Michael and Terry, Ellie and Ye, Yifan, Did the 2017 Tax Reform Discriminate Against Blue State Voters? (2019-04-01). FRB Atlanta Working Paper No. 2019-7. Available at SSRN: https://ssrn.com/abstract=3376804 or http://dx.doi.org/10.29338/wp2019-07

David Altig (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216-579-2041 (Phone)

University of Chicago - Booth School of Business

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Alan Jeffrey Auerbach

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-0711 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Patrick C. Higgins

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Darryl Koehler

Economic Security Planning ( email )

416 S. Ludington Street
Columbus, WI 53925
United States

Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4002 (Phone)
617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

Michael Leiseca

Economic Security Planning ( email )

416 S. Ludington Street
Columbus, WI 53925
United States

Ellie Terry

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Yifan Ye

Boston University ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
8
Abstract Views
72
PlumX Metrics