Capitalization of SALT in Metro Housing Prices after TCJA

Students

2021
College

Faculty

Professor of Economics

Project Summary

Summary of PURM Research Experience: Studying the capitalization of the SALT in Metro Housing Prices after the TCJA

The Tax Cut and Jobs Act (TJCA), in effect since 2018, represents the most comprehensive reform of the federal tax code since 1986. Although its most publicized aspect is the reduction of corporate and income taxes, it partially finances these cuts by capping the deduction of state and local taxes (SALT) for federal taxation. This change almost exclusively affects individuals with very high incomes residing in high-SALT metro areas such as San Francisco, Los Angeles or New York, who have experienced a significant hike in their federal taxes. As the cost of living in such areas increases, we naturally expect some effect in their housing markets. The objective of my research project was to study this effect – to reveal to what extent have these changes in incentives been capitalized in the housing prices of the 25 largest metropolitan areas in the US.

During the summer, I worked under the mentorship of Dr. Holger Sieg from the Department of Economics. He suggested this topic and guided me through every step of our research plan in our biweekly meetings, from retrieving and structuring relevant data to the analysis and presentation of the results. I was able to manage my schedule quite freely as I could work from my computer; this allowed me to take a summer as well. We mainly used Stata for this project – although I did not previously know the software package, I acquired extensive experience on this valuable scientific tool by solving all problems that came up along the way. More than anything, I learned what motivates rigorous research in economics and how it is conducted. As an economics major myself, it was a great opportunity to learn how knowledge in my field of study is created and how concepts we study in class are used to illuminate our understanding of real-world phenomena.