The impact of capping the SALT deduction on municipal bond pricing

Using California county-level data, we show that municipal bond yields became less sensitive to local real estate tax revenues following the cap on state and local tax (SALT) deductions imposed by the Tax Cuts and Jobs Act (TCJA). This effect is more pronounced in counties where taxpayers were less likely to support future tax increases and in counties with fewer financial constraints. Additionally, we find that voter support for local tax ballot proposals declined upon enactment of the TCJA. Our findings suggest that the TCJA heightened uncertainty around counties’ ability to collect local property taxes which, in turn, influenced the pricing of municipal securities.