AMERICANS PICK LONGER COMMUTES OVER HIGHER TAXES: New evidence

01 Dec 2018

US households are willing to accept longer commutes to work in exchange for lower state income taxes, according to research by David Agrawal and William Hoyt, published in the December 2018 issue of The Economic Journal.

Their study looks households in urban areas, such as Philadelphia, St Louis and New York, which are located near state borders. When state income taxes are based on the location of residence, households move to the lower-tax state in the urban area and commute longer to work. When taxes are purely employment-based, firms and jobs relocate to the lower-tax state, also resulting in longer commutes.

Commuting times are important because they capture changes in both residence and employment locations. The relocation of jobs and residences in response to taxes contribute to urban sprawl in exchange for lower taxes in one state.

In the United States, 75 million people live in urban areas that straddle a state border and in some states, such as Maryland, interstate commuting is as high as 18% of the population. The state to which households pay income taxes depends on the tax treaties in place.

Some states, such as New Jersey and Pennsylvania, have reciprocity agreements that allow people to pay taxes only in the state of residence. Most states do not have such tax treaties and pay taxes on their labour earnings to the state of work. In the European Union, commuting between countries and the income tax treatment of foreign workers also affect commuting times.

The new study uses household level data on commuting times, residence location and employment location from the American Community Survey. Using income data, the authors estimate the income taxes that the household would pay in all states of the urban area. They then identify the effect of tax rate changes on commuting times.

For households in the top 10% of the income distribution, when taxes are residence-based, a one percentage point decrease in the income tax rate can increase commuting times by up to one minute per one-way trip or 3% of the average commute. In states where earnings are taxed in the state of employment, a one percentage point change in taxes can change commuting times by up to one and a quarter minutes.

The researchers then use their commuting time estimates to determine the dollar cost of longer commutes resulting from different income tax rates within the urban area. For households in the top 10% of income, a one percentage point tax differential between residence-based states amounts to approximately $2,200 in commuting costs.

Using an hourly wage appropriate for these households and the observation that commuting times change by about a minute, the monetary cost of a longer commute to save taxes is worth nearly $900 a year per household. This offsets over 40% of the hypothetical tax savings resulting from the two state tax systems within the urban area.

Some of the $900 worth of losses realised by households with longer commutes on the low-tax side of the urban area are offset by gains from shorter commutes on the high-tax side of the urban area. But significant welfare losses persist.

These results have implications for other policies. For example, following the passage of the Affordable Care Act, some states elected to expand Medicaid while others did not. Given that this policy is residence-based, it would be reasonable to expect migration of eligible households to the states where Medicaid expanded, resulting in longer commutes.

In contrast, a number of states and cities recently increased minimum wages. As this policy is employment-based, it would be reasonable to expect migration of employment to states that have not increased minimum wages, again creating changes in commutes for residents of the urban area crossing the border.

Commuting and Taxes: Theory, Empirics and Welfare Implications’ by David R Agrawal and William H Hoyt.

David Agrawal

Martin School of Public Policy and the Department of Economics at the University of Kentucky | +1-859-257-2111 | dragrawal@uky.edu

William Hoyt

Martin School of Public Policy and the Department of Economics at the University of Kentucky | +1-859-257-2518 | whoyt@uky.edu