Differential Migration Costs and the Lessons for Progressivity in State-Level Taxes

• Activity Number: 181
• Type: Contributed
• Date/Time: Monday, August 5, 2013 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Jeffrey Thompson*+
• Companies: Federal Reserve Board
• Keywords: TAXSIM ; migration ; state taxes

Abstract

This paper uses NBER's TAXSIM to explore an important state tax policy question. Policy makers are concerned with households leaving states with high taxes, and optimal tax theory suggests high rates on mobile households will produce deadweight loss. These concerns have been cited as reasons to not pursue progressive taxes. Mobile workers responsive to cross-state tax differences are expected to make location decisions that equalize skill-adjusted returns to labor over space. Relocation generates deadweight loss and undermines the redistribution in progressive taxes. High-income households, though, are not very geographically mobile; young and highly-educated workers are most likely to move between states. This paper uses state level pseudo-panels to test the wage equalization hypothesis for different worker types, and evaluates the policy implications. Wages of young, highly-educated workers, with middle incomes, are highly responsive to interstate tax differences. Earnings for high-income workers, who are highly educated, but older, are not responsive. The findings imply states should be more concerned with how taxes treat young workers than how they treat high-income households.