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The Impact of Capping the SALT Deduction on Municipal Bond Pricing
Working paper   Open access

The Impact of Capping the SALT Deduction on Municipal Bond Pricing

Mikhail Pevzner, Alan Reinstein, Matthew Wynter and Tong Yao
SSRN
12/10/2022
DOI: 10.2139/ssrn.4295035
url
https://doi.org/10.2139/ssrn.4295035View
Open Access

Abstract

We examine the impact of the Tax Cuts and Jobs Act’s (TCJA, also known as the “Trump tax cuts”) cap on the state and local tax (SALT) deduction on the relationship between municipal bond spreads and real estate tax revenues by examining California counties’ financial and municipal bond data from 2016 to 2019. Consistent with the SALT deduction limitation negatively affecting counties’ expected future ability to raise more real estate tax revenues, we find that after the passage of TCJA, this relationship weakens. We further find that this impact is more pronounced for counties where taxpayers are less likely to support future tax increases and for counties that are less financially constrained and thus are less reliant on future real estate tax increases for their financing. Using California’s voting data, we find that its voters are less likely to support tax ballot proposals in counties with higher extant real estate tax revenues in the post-TCJA period. Overall, our evidence indicates that, in the post-TCJA period, real estate tax revenue becomes a less important determinant of municipal bond spreads—likely because of voters’ unwillingness to continue supporting future real estate tax increases due to voters’ expected inability to derive tax deduction benefits from additional local tax payments

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