The effects of interstate tax differentials on wages with an application to interstate migration

This research asks the question "Are interstate personal income tax differentials reflected in wages?" The theory that I develop suggests that under certain assumptions regarding labor mobility and output competition, wages may be positively or negatively affected by taxes. Two empirical models are proposed to test for the effect of taxes on wages: an individual wage determination model that estimates the effect of tax differentials on wages by industry and occupation, and an individual migration model.;The empirical results show that in some industries, wage tax differentials positively affect gross wages and negatively affect gross wages in others. This finding has implications for the competitive position of various regions. If taxes are positively reflected in wages, in the short run, state governments may find larger than expected tax revenues. However, in the long run the higher wages may discourage new industrial location. In terms of the migration response to tax differentials, if labor moves in response to increased taxes, the state governments will realize smaller than expected tax revenues.;The results from the migration estimation are not as compelling as those of the wage equation. Although the results show that after tax wages do have an impact on the migration decision for individuals in some industries, the results from the migration equation are by no means conclusive regarding the effect of state personal income taxes on migration.;The empirical model is tested using a truncated regression technique. Data from the IRS, Current Population Survey, BLS, and ACIR are used to measure the effect of tax differentials by industry and occupation. The second model (migration model) tests for the effect of wage taxes on wages in an indirect fashion. The premise is: if tax differentials are fully reflected in wages, then changes in tax rates should not influence migration, all else held equal, since there is no gain to moving. This model is test using data from the Current Population Survey, employing a logit estimation technique.