MSA Location and the Impact of State Taxes on Employment and Population: A Comparison of Border and Interior MSA's
We examine the impact of state taxation on employment by focusing on county employment in metropolitan statistical areas (MSA). However, we make a distinction between the impacts of state taxation on employment in metropolitan areas that are wholly contained within a single state and metropolitan areas that consist of counties in more than a single state. We make this distinction because, as we argue in the paper, the impacts of state taxes on both employment and population may be very different in metropolitan areas that border states and those that do not. We expect there to be differences both because the cost of avoiding state taxes, that is, mobility costs, might be lower along borders and also because along borders employees need not reside in the same state in which they are employed. Thus, while in general we believe that employment should be more responsive to taxes in border MSA's, for some taxes, specifically taxes imposed on households, employment might be less responsive as households rather than firms can move to avoid these taxes. Because both the location of employment and residence are affected, and possibly differentially so, by state taxes, we jointly estimate the impacts that taxation may have on employment and population. Our results indicate that there are differences in the responsiveness of both employment and population to both tax and spending variables between border and interior jurisdictions. We also find that the impact of neighboring state taxes have differential effects on employment and population. That there are significant differences in the response to taxation and different type of taxes in border and interior counties suggests state-level estimates of the impacts of taxation may suffer from significant aggregation bias.
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