Increases to the standard federal tax deduction implemented in 2018 and made permanent last year have influenced how voters approach local spending on infrastructure and community services, according to research published by a Penn State team on July 17. The study found that less wealthy taxpayers who take the standard deduction are now more likely to vote against local spending measures, such as those for repairing or building schools.
Brent W. Ambrose, Jason and Julie Borrelli Faculty Chair in Real Estate at Penn State's Smeal College of Business, along with Maxence Valentin of ETH Zürich, published their findings in The Review of Economics and Statistics. Ambrose said, "When you file your federal income taxes, you can either take the standard deduction...or you can itemize...State and local taxes are one of the biggest things people can itemize. That includes property taxes...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."
Ambrose explained that after Congress passed the Tax Cuts and Jobs Act in 2017—doubling the standard deduction—many homeowners stopped itemizing their property taxes because their total deductions no longer exceeded the new threshold: "Suddenly, they were paying the full cost of their local taxes without any federal offset." This change meant voters became less willing to approve bond measures for new schools or upgrades funded by property tax increases.
The research examined over 1,500 school district referendum results in California between 2008 and 2022. Ambrose said, "We found that for every one percentage point drop in the share of residents who were deducting their property taxes...the approval rate for school bond and tax measures fell by just under one percentage point." He added that passing rates dropped from about 81% before the tax change to about 62% after it.
Ambrose also noted city referendum approval rates remained steady since most city revenues come from sources not typically deducted on federal returns: "It was specifically the school district measures...that saw the decline. That tells us it really was the tax change driving behavior." The study further determined COVID-19 school closures did not influence these results.
The researchers concluded that wealthier communities continued approving spending due to higher rates of itemization under existing caps, while middle-income areas pulled back: "That widened the gap in public service quality between rich and poor areas," Ambrose said.
