Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Did the 2017 Tax Reform Discriminate against Blue State Voters?

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

Did the 2017 Tax Reform Discriminate against Blue State Voters?

Article excerpt

1 Introduction

The 2017 Tax Cut and Jobs Act (TCJA) represents the most significant change to U.S. personal and corporate income taxation since the 1986 Tax Reform Act. The TCJA's personal tax changes reduced the top marginal tax rate, eliminated exemptions, expanded the child tax credit, expanded the standard deduction, lowered the cap on future mortgage-interest deductions, and introduced a $10,000 limitation on the amount of state and local taxes (SALT) that can be deducted. Previously there was no limit, except for those subject to the Alternative Minimum Tax (AMT). This paper estimates the effect of these changes on U.S. households and demonstrates that the reduction in taxes and corresponding increase in remaining lifetime spending differentially affected residents of particular states, which we classify as blue, red or purple based on their recent voting behavior in presidential elections.

Our analysis is based on a detailed life-cycle consumption-smoothing program called The Fiscal Analyzer, or TFA, described in Kotlikoff (2019). Auerbach, et al. (2016, 2017, and 2018) have used TFA to study overall fiscal progressivity, remaining marginal net lifetime tax rates on working, and the progressivity of the TCJA. This study is the first use of TFA to study how changes in federal taxes differentially impact households who differ not only by resource percentile within age cohort, but also by state.

To explore red-blue TCJA differences, we designate states, including the District of Columbia, as blue, red or purple based on the average voter margin over the past five presidential elections. States where the Republican share of total votes was, on average, five percentage points higher than the Democratic share of total votes over the past five presidential elections are classified as red. States where the Democratic share of total votes was, on average, five percentage points higher than the Republican share of total votes over the past five presidential elections are classified as blue. The remaining states are classified as purple.

To examine the distributional impact of the TCJA, we classify households in the Federal Reserve Board's 2016 Survey of Consumer Finances (SCF) into "resource" percentiles based on how much human wealth (such as wage income) and non-human wealth (such as home equity) they are projected to have over their lifetime relative to their same-aged peers. (1) Lifetime resources for households, along with lifetime spending and net-taxes (taxes minus transfers), are projected using TFA, which incorporates details of all major federal and state tax and transfer payment policies.

TFA also incorporates pre-TCJA personal and corporate-income tax codes. As an output, TFA imputes and projects all taxes paid over the lifetime, discounting all to present value. (2) Hence, it can be used to measure the TCJAinduced percentage change in the discounted present value of remaining lifetime spending for each SCF household. To determine differences in annual TCJA treatment by state, each SCF household is run through TFA 51 times (once for each state, and the District of Columbia). In each of these 51 runs through TFA, state-specific fiscal policies are applied and state-specific weights are assigned to each SCF observation.

Throughout our analysis we assume that the provisions of the TCJA are made permanent. According to our findings, red-state households enjoy, on average, a 1.6 percent increase in lifetime spending (henceforth, spending) due to permanent implementation of the TCJA. This compares to a 1.3 percent increase in spending for blue-state households. The state with the highest gain - 2.1 percent--is Wyoming--a red state. The state with the smallest gain 0.9 percent--is California--a blue state.

The red-blue differential is explained by the limitation on the SALT deduction. Excluding the SALT limitation from TCJA, the average red-state spending gain is 1.9 percent versus 2. …

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