Abstract
This paper analyzes how changes to the deductibility of state and local taxes under the federal personal income tax affect local fiscal outcomes. This paper is the first to study the impact of changing tax prices on local fiscal outcomes while allowing for local heterogeneity in tax incentives at the county level. Exploiting variation at the county level yields a more elastic relationship between tax price and local spending than using coarser units of observation. Simulations suggest that limiting the deduction for state and local taxes would not disproportionately hurt resource-poor areas, making such limits potentially progressive policy options.
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