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The Unequal Geographic Burden of Federal Taxation

Federal taxes lower long-run employment levels in high-wage areas by 15 percent.

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.

The President’s Advisory Panel has recommended setting mortgage deduction caps according to local prices, but that proposal, like proposals to index federal tax brackets to local cost-of-living measures, would be difficult to implement. Allowing the mortgage deduction limit to vary by place would, in addition, do little to help those who do not itemize their deductions. Such non-itemizers represent a significant proportion of those affected by the federal tax disparity.

-- Lester Picker