Taxing Sunny Days: Adjusting Taxes for Regional Living Costs and Amenities
Posted: 18 Mar 2003
Taxpayers pay tax on their nominal income without regard to their regional cost of living or the value of their regional amenities. Although commentators have argued that the income tax's failure to account for such differences is unfair - because residents of high-cost and low-amenity regions pay higher taxes than residents of low-cost and high-amenity regions - that argument is unpersuasive because migration tends to eliminate regional differences in living standards. The tax system's failure to adjust for regional differences is, however, likely to misallocate resources across regions in two ways. First, it is likely to discourage taxpayers from settling in high-cost regions where the high cost of living is matched by high salaries. Second, it is likely to discourage taxpayers from settling in low-amenity regions where the lower value of amenities is reflected in higher salaries. Both misallocations can be eliminated by multiplying each taxpayer's earned income (but not her unearned income) by the reciprocal of the region's relative salary level. Such a relative salary multiplier imposes the same nominal tax on each resident without regard to her location, thereby eliminating the tax-driven incentive for individuals to settle in low-tax regions.
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