ASSESSING THE HETEROGENEOUS EFFECTS OF THE STATE AND LOCAL TAX DEDUCTION CAP ON U.S. LOCAL LABOR MARKETS

Abstract

The Tax Cuts and Jobs Act of 2017 (TCJA), signed into law in December 2017 and effective beginning in the calendar year 2018, overhauled the U.S. federal tax code for individuals. The state and local tax (SALT) deduction cap, one of the more prominent measures in the TCJA, instituted a $10,000 maximum limit on the state and local taxes available for individual filers to deduct from their tax burden, where previously the full amount was available for deduction. This thesis examines the SALT deduction cap’s heterogeneous labor market effects on high- and low-tax jurisdictions. More specifically, this thesis assesses evidence on how the imposition of the cap affected local labor markets, dependent on the level of state and local taxes. The findings indicate that the SALT deduction cap impacted high- and low-tax areas differently, with local labor markets adjusting to account for relative changes in individuals’ after-tax earnings and incentives to relocate. These results are consistent with standard models of local labor market dynamics, and further imply that workers face material, though not insurmountable, costs to geographic mobility.