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The Tax Cut and Jobs Act, SALT, and the Blue State Blues: It’s All Relative

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« Improving Labor Force Participation | Main | Mapping the Financial Frontier at the Financial Markets Conference » Nearly two months have passed since tax day, but the full impact of the 2017 Tax Cut and Jobs Act (TCJA) ...

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Nearly two months have passed since tax day, but the full impact of the 2017 Tax Cut and Jobs Act (TCJA) has yet to be fully assessed. Both the data, and in fact the rules themselves, are still incomplete. Nonetheless, conventional wisdom seems to hold that the legislation created winners and losers, and that the losers primarily reside in so-called "blue" states—those where the majority of voters have consistently gone for the Democratic presidential candidate in recent elections.

The source of this belief springs from the newly imposed limitations on federal deductions of state and local taxes, or SALT, and the disproportional impact of these limitations on taxpayers in high-tax, high-income states—the majority of which are blue. A CNBC report from last week on pushback from blue-state politicians summarizes a typical reaction: "Lawmakers from high-tax districts say their constituents have suffered from the provision in the tax plan."

Is this view justified? In our own research, we focus on the long-term effects of the TCJA with the assumption that the legislation's provisions eventually become permanent. (The individual tax cuts are currently scheduled to expire in 2025.) Examining individual households from the 2016 Federal Reserve Board of Governors' Survey of Consumer Finances and incorporating state-specific tax provisions, we reached a few major conclusions regarding TCJA's impact.

First, the overwhelming majority of taxpayers across the country stand to enjoy lifetime gains in after-tax income as a result of the TCJA. The following chart documents our estimates of lifetime gains in every state and the District of Columba, by state-specific wealth quintile. (Wealth here is defined inclusive of human wealth—that is, it includes the present-value of expected wage and salary income.) The chart has a lot of information, but the key point here is the preponderance of blue-shaded areas, which represent the proportion of gainers in each wealth quintile, in each state. Outright losers—represented in the chart by the red shaded areas in each row—are confined to a very small proportion of the wealthy.

The Tax Cut and Jobs Act, SALT, and the Blue State Blues: It's All Relative

What is true is that the tax cuts were relatively more favorable, in percentage terms, to red-state residents. Our estimates show that the percentage reduction in the present value of lifetime taxes for red states is nearly twice that of blue states—but not in absolute terms. We calculate the average change in lifetime after-tax income for individuals in blue states to be $25,781, compared to a $23,094 average for red states. (In absolute terms, "purple" states—those averaging less than a 5 percent margin for either party over the past five election cycles—had the largest average gain of all, at $27,042.)

Another point worth emphasizing: the relatively smaller blue-state gains don't result from the fact that they are high-income states but instead result from the fact that they are high-tax states. When we control for the demographic make-up of states—and hence keep the income distribution across states constant—we get essentially the same implications for the distribution of TCJA tax gains.

It is likely true that blue-state taxpayers didn't gain as much as their red-state counterparts as a result of the TCJA. But for the most part, our estimates suggest they did indeed gain.

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macroblog
The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues. Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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