UNIVERSITY PARK, Pa. — Increases to the standard federal tax deduction implemented in 2018 were made permanent a year ago , and researchers are beginning to understand the downstream effects on state and local municipalities. The increased deduction meant many taxpayers received a bigger tax break by taking the standard deduction instead of itemizing their expenses, including state and local taxes (SALT). However, a Penn State research team has found that less wealthy taxpayers who take the standard deduction have become more likely to vote against local spending for repairing or building infrastructure or other community services.
Brent W. Ambrose, the Jason and Julie Borrelli Faculty Chair in Real Estate and founding director of the Borelli Institute for Real Estate Studies at Penn State's Smeal College of Business, and Maxence Valentin, who earned his doctorate from Penn State in 2022 and is currently a senior researcher in real estate finance and local public finance at ETH Zürich, published their findings in The Review of Economics and Statistics .
In this Q&A, Ambrose discussed their work and how federal taxes influence local funding.
Q: Why does itemizing state and local taxes matter for a federal deduction?
Ambrose: When you file your federal income taxes, you can either take the standard deduction, a flat amount the government lets everyone subtract from their taxable income‚ or you can itemize, meaning you list out all your actual deductible expenses. State and local taxes are one of the biggest things people can itemize. That includes property taxes, which is the tax you pay on your home.
If you're paying $5,000 a year in property taxes and you can deduct that on your federal return, the federal government is essentially picking up part of that tab. It makes your local taxes cheaper than they would otherwise be. That's a subsidy from the federal government to homeowners who itemize.
Q: What changed in 2018?
Ambrose: That was the first year the Tax Cuts and Jobs Act, which Congress passed in 2017, went into effect. It roughly doubled the standard deduction from about $12,700 to $24,000 for married couples. On the surface, that sounds like a win for taxpayers. And for most people, it was simpler. You didn't have to track all your deductions anymore.
So, millions of homeowners who used to deduct their property taxes stopped doing so because their total deductions no longer exceeded the standard amount. Suddenly, they were paying the full cost of their local taxes without any federal offset. Their local taxes effectively got more expensive overnight, even though the local tax rate didn't change at all.
Q: How does that connect to schools and local services?
Ambrose: Let's say your local school district wants to build a new school. In California, which has some of the highest SALT rates in the country and is where we focused our research, the school district needed to issue a bond to fund the new school. They have to put the bond measure on the ballot and ask voters to approve it. If voters say yes, the district issues bonds, and those bonds get paid back through local property taxes.
What we found is that when people lost the ability to deduct their property taxes, they became less willing to approve those bond measures. In other words, if your property taxes just got more expensive in real terms, you're going to think twice before voting to raise them further to build a new school or upgrade facilities.
In this study, we looked at more than 1,500 school district referendum results in California between 2008 and 2022. We found that for every one percentage point drop in the share of residents who were deducting their property taxes — meaning the less wealthy people who did not exceed the standard deduction with itemized amounts — the approval rate for school bond and tax measures fell by just under one percentage point.
That might sound small, but it adds up fast. Across California school districts, this shift alone can explain most of the increase in defeated school referendums we saw after 2018. The passing rate for these measures dropped from about 81% before the tax change to about 62% after it.
Q: Are there any other factors, like increased anti-government spending sentiment, that might've influenced these votes beyond the increased deduction?
Ambrose: Cities in California also hold tax referendums, but city revenues mostly come from sales taxes and other sources that aren't typically deducted on federal returns. So, if people were just broadly sour on government spending, you'd expect city referendum approval rates to drop, too — but they didn't.
City referendum approval rates were unaffected; it was specifically the school district measures, which are funded by deductible property taxes, that saw the decline. That tells us it really was the tax change driving the behavior, not just a general anti-spending sentiment.
We also checked whether COVID school closures played a role. They didn't. The effect we found holds even when we account for how long schools were operating remotely.
Q: What was the most surprising about this finding?
Ambrose: Honestly, what surprised me was how directly it showed up in the voting data. I expected that making local taxes more expensive would affect property values or bond yields, and we've found evidence of that in related research. But seeing it show up so clearly in the actual approval rates of bond referendums in California, that was striking. People really did respond to price signals, even when they may not have fully articulated it in those terms.
The communities most affected were middle-income with a significant share of residents who used to itemize but no longer do. In those places, the loss of the federal subsidy made local taxes feel more expensive, and voters pulled back on approving new spending.
Meanwhile, in high-income communities, many residents were still itemizing, often because their property taxes and mortgage interest were high enough to justify it even with the higher standard deduction. Those communities were still getting a federal subsidy — up to the $10,000 cap imposed for SALT at the time — on their local taxes, which means their effective cost of funding local services was lower.
The result was that wealthy communities were more likely to keep approving spending on schools and infrastructure, while less wealthy communities were pulling back. That widened the gap in public service quality between rich and poor areas. It's not that people in lower-income areas value good schools less; it's that the federal tax code was effectively giving wealthier communities a discount that others didn't get.
Q: Congress is currently considering multiple bills related to the SALT deduction. How does your work contribute to that conversation?
Ambrose: Last year, Congress increased the cap to $40,400 for married couples filing jointly, but they are still debating whether to restore or expand the SALT deduction — as they have for years. Most of the debate focuses on who benefits from the deduction from an income standpoint, and critics correctly point out that it disproportionately benefits higher-income households who itemize.
But our research adds another layer to the conversation. The SALT deduction isn't just a tax break for individuals — it also functions as a federal subsidy for local public investment. That has real consequences for communities, for educational outcomes, for property values and, ultimately, for economic opportunity. At the end of the day, this is a policy question that is up to politicians and voters to decide. Hopefully, our research can help inform the public about the costs and benefits of this policy.
