Taxing Sunny Days: Adjusting Taxes for Regional Living Costs and Amenities

Posted: 18 Mar 2003

See all articles by Michael S. Knoll

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Thomas Douglas Griffith

University of Southern California Law School

Abstract

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.

Suggested Citation

Knoll, Michael S. and Griffith, Thomas Douglas, Taxing Sunny Days: Adjusting Taxes for Regional Living Costs and Amenities. Harvard Law Review, Vol. 116, p. 987, 2003. Available at SSRN: https://ssrn.com/abstract=388941

Michael S. Knoll (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

Thomas Douglas Griffith

University of Southern California Law School ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-2533 (Phone)
213-740-5502 (Fax)

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