August 2021

The Impact of the State and Local Tax (SALT) Deduction Cap on U.S. Home Prices (WP-2021-02)

This publication is a part of:

Collection: OCC Working Papers – New Frontiers in Bank Risk

Abstract

The Tax Cuts and Jobs Act of 2017 changed the federal tax treatment of state and local tax (SALT) deductions that had underpinned the fiscal policies promoting homeownership and state/local government finances for over 100 years. The SALT deductions are limited by a cap of $10,000, effective 2018. This paper assesses the impact of the SALT cap on home prices based on data from 945 counties that cover 83 percent of the U.S. population. It finds that, by increasing user cost of owning homes, the SALT deduction cap had a significant negative impact on home prices in high-SALT counties. The cap reduced their annual growth rate by 0.79 percentage points, representing a reduction of nearly one-fourth of the U.S. historical growth rate per year. The hardest hit were expensive homes in high-SALT and high-cost counties, as the SALT deduction cap slashed their annual price growth rate by 0.95 percentage points. Among four state and local tax types, state and local income tax had the strongest effect. These home price impacts were not altered by the coronavirus pandemic in 2020. This study has important implications for mortgage finance and mobility.

Author

Zhong Yi Tong