Lifting the cap on state and local tax deductions was a defining issue during the policy debates that helped forge the One Big Beautiful Bill Act as research now reveals positive effects from the original cap.
"The 2017 Tax Cuts and Jobs Act capped the deductibility of state and local taxes from federally taxable income, raising effective tax rates for high-income households, and making tax-exempt municipal bonds more attractive."
"The resulting demand shock flowed into state-specific municipal bond funds."
The findings come from a
The paper was presented during the 15th annual Brookings Municipal Finance Conference which happened this week in Washington D.C.
Capping the deduction on state and local taxes has been a flashpoint in muniland since it became law.
Originally set at $10,000, residents in high tax states clamored for relief, while municipalities decried the legislation as an infringement on local tax policy.
The One Big Beautiful Bill Act, passed in the second Trump administration raised the individual deduction to $40,000. Several states have also passed laws allowing "pass through exemptions," as way for business owners to shield income against the cap.
The researchers surveyed data from a cross section of U.S. counties following the original legislation.
"We compute that on average, this tax increase is about $5,000 per person per year, but this is very heterogeneous," said Brunamonti.
"In Texas, the effect is zero because of the state tax, but in the richest counties, such as those in California, the effect was north of $20,000 per person per year."
The research also reveals a major shift in investment trends. "We show that this tax increase generates record flows into municipal mutual funds," said Brunamonti.
"For the first time, municipal funds started behaving differently by investing the additional flows into low-income counties that they previously neglected."
The researchers crunched the numbers by considering the par value of issued municipal debt divided by county income as compared to the evolution of debt issuance in different counties.
"We interpret this as the SALT provision causing a windfall funding that was directed exactly against these low-income states that need money the most," said Brunamonti.
The credits that were generated were mostly financing new money and structured as revenue bonds.
The research is, for the most part, endorsed by practitioners on Wall Street.
"The SALT cap policy change increased the demand of muni bonds from the individual investors" said Ye Tian, executive director on the municipal research & strategy team at J.P Morgan.
"This is pretty compelling and we agree that as the high earners effective tax rate became higher after the TCJA, it naturally makes municipal bonds more attractive to them."
Tian cites statistics showing that the percentage of individual retail investors holding munis went to 81% in 2025 from 75% in 2017. His figures also show the entire muni market is now pegged at $4.4 trillion up from $3.8 trillion.
Tian also cited the elimination of advance refunding in the 2017 TCJA act and the drop of the corporate tax rates as factors also contributing to higher inflows into municipal bonds.
