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MSA Location and the Impact of State Taxes on Employment and Population: A Comparison of Border and Interior MSA's

Author

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  • William H. Hoyt

    (Department of Economics, Gatton School of Business and Economics, and Martin School of Public Policy and Administration, University of Kentucky)

  • J. William Harden

    (Department of Accounting, Bryan School of Business and Economics, University of North Carolina at Greensboro)

Abstract

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.

Suggested Citation

  • William H. Hoyt & J. William Harden, 2005. "MSA Location and the Impact of State Taxes on Employment and Population: A Comparison of Border and Interior MSA's," Working Papers 2005-01, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    • Handle: RePEc:ifr:wpaper:2005-01
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    References listed on IDEAS

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    Cited by:

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    2. Thompson, Jeffrey P. & Rohlin, Shawn M., 2012. "The Effect of Sales Taxes on Employment: New Evidence From Cross-Border Panel Data Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(4), pages 1023-1041, December.
    3. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," CESifo Working Paper Series 1865, CESifo.
    4. Rohlin, Shawn M. & Thompson, Jeffrey P., 2018. "Local sales taxes, employment, and tax competition," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 373-383.
    5. Shawn M. Rohlin & Jeffrey P. Thompson, 2013. "The effect of state and local sales taxes on employment at state borders," Finance and Economics Discussion Series 2013-49, Board of Governors of the Federal Reserve System (U.S.).
    6. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    7. Melissa Gentry & Nadia Greenhalgh-Stanley & Shawn M. Rohlin & Jeffrey P. Thompson, 2020. "Dynamic Sales Tax Competition: Evidence from Panel Data at the Border," Working Papers 20-5, Federal Reserve Bank of Boston.
    8. Buettner, Thiess & Wildasin, David E., 2006. "The dynamics of municipal fiscal adjustment," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1115-1132, August.
    9. Enami, Ali & Reynolds, C. Lockwood & Rohlin, Shawn M., 2023. "The effect of property taxes on businesses: Evidence from a dynamic regression discontinuity approach," Regional Science and Urban Economics, Elsevier, vol. 100(C).
    10. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-1217, September.
    11. Wildasin, David E., 2007. "Pre–Emption: Federal Statutory Intervention in State Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(3), pages 649-662, September.
    12. David Wildasin, 2009. "State and Local Government Finance in the Current Crisis: Time for Emergency Federal Relief?," Working Papers 2009-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    13. Clifford J. Carrubba & Matthew Gabel, 2005. "Do Governments Sway European Court of Justice Decision-making?: Evidence from Government Court Briefs," Working Papers 2005-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.

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    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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