Lessons on State and Local Income Taxes from the Twenty-first Century and Challenges for the Future

I survey the research on the last twenty-five years of subnational income tax policy and conclude that the defining feature of state and local income taxes is geography. Geographic boundaries limit the power of subnational governments to tax people and activities. The article discusses where income should be taxed and the behavioral effects of these tax rules on the interjurisdictional mobility of people and jobs. I then examine how this mobility can heighten tax competition, which in turn can limit the ability of state and local governments to engage in progressive redistribution. I include a discussion of how telework will influence the future of the income tax by decoupling the locations of the employee and employer. Important areas for future research for the coming decades are highlighted throughout the article.