Unmasking Local Fiscal Responses to Federal Tax Deductibility

Internal migration and the effective price of state and local taxes

“…As with other extensive-margin decisions, location decisions depend on average rather than marginal taxes (Kleven et al, 2020). 3 The tax price of SALT can be thought of as the effective cost of $1 of state and local spending (Feldstein and Metcalf, 1987;Coyne, 2017). Fundamentally, the tax price of SALT is the amount by which SALT liability is offset by a decline in federal income tax liability caused by SALT.…”

“…A details the construction of the TAXSIM variables using the ACS data, which closely follows the procedure of Coyne (2017). I focus my analysis on the household unit.…”

“…State fixed effects 𝜉 𝑗 and 𝜉 𝑘 are included to capture the effect of amenity-productivity levels and any other time-invariant, state-level policies, and year fixed effects 𝜉 𝑡 capture macroeconomic factors that affect all states in a particular year. After controlling for these potential confounding factors, the remaining identifying variation should come solely from changes to federal tax policy and non-linearities in the mapping from smooth changes in the income distribution and federal marginal tax rates (Coyne, 2017).…”

“…6 As such, the analysis corresponds to a potential worst-case scenario. 6 As shown by Feldstein and Metcalf (1987) and Coyne (2017), state and local governments shift their revenueraising strategies and expenditures in response to changes in the tax price of SALT. An increase in the tax price for once-deductible taxes may encourage policymakers to shift taxes away from those bases and toward other revenue sources, such as charges and fees.…”

“…From state and local governments' point of view, the average tax price in a region is the relevant determinant of fiscal outcomes(Feldstein and Metcalf, 1987;Coyne 2017). …”