The Unequal Geographic Burden of Federal Taxation

National Bureau of Economic Research ^ | November 2008 | Lester Picker

[reaganaut1]

In the United States, workers in cities offering above-average nominal wages pay 30 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. In The Unequal Geographic Burden of Federal Taxation (NBER Working Paper No. 13995), author David Albouy estimates that federal taxes lower long-run employment levels in high-wage areas by 15 percent, depress land prices there by 25 percent, and reduce housing prices in the area by 4 percent. Economists term these negative outcomes "locational inefficiencies", and Albouy estimates that they cost taxpayers $34 billion in 2005.

In the United States, highly taxed areas tend to be in large cities inside of populous states. Albouy conjectures that their higher tax burdens may be a reflection of their relatively low Senate representation and later Presidential primaries. The taxpayers in these highly taxed states often claim larger deductions than their counterparts in states with lower federal taxes. While these deductions may help workers to locate more efficiently, their effect is not strong enough to offset the consumption inefficiencies that are caused by higher nominal incomes and correspondingly higher taxes. Locational efficiency is easier to achieve by indexing taxes than by providing deductions.

[RobRoy]

This is one reason I am moving to Kentucky. I have said for years that what is considered rich in some areas is considered lower middle class in others. Yet the federal tax system is the same wherever you live.

In eastern Kentucky, $150,000 a year is “rich”. In Manhattan, good luck finding a studio apartment.

If one can telecommute, the world is their oyster. Well, the US is anyway...

[meyer]

It would be interesting to watch, as for example when the interstate highway system went away in rural areas.

Good point regarding disbursement of funds, but perhaps we'd see some self-sustaining, toll-funded private roads instead. Enterprising people are certainly capable of finding solutions outside of the confines of the federal government. And it's a good bet that unlike government projects in general, only the people that use them would have to pay for them.

[M. Dodge Thomas]

Opposition to private toll roads is pretty fierce in some quarters here - occasionally I also suggest that things like congestion pricing and automatically tolled usage fees would be a good idea good idea on publicly funded highways, usually I’m accused of being a socialist or worse.

I think it’s coming down the pike though, given GPS it’s becoming increasingly practical to charge motorists not only for miles driven but for some of the externalities, for example you can charge heavier vehicles more per mile to reflect the fact that they create greater ware on road surfaces (to some extent they already pay higher usage fees, as heavier vehicles usually use more gas, which is taxed at the pump for road construction and maintenance).

I’ve never seen studies that attempt to assess the real per mile cost of running a given vehicle on a given road, but I’ll bet it would be a real shocker, especially for people in rural areas with low average traffic - for example there’s little stretch of road that I take past Questa NM to the Wild Rivers recreation area, at the times of year when I’m there you can drive the whole length and likely see no more than one or two cars, it would be interesting to know given the cost of maintaining that road how much I really ought to be charged if I’m paying my fair share to maintain it.