STATE INCOME TAXES AND MILITARY SERVICE MEMBERS' LEGAL RESIDENCY CHOICES

State income taxation acts as a deterrent to labour force in-migration ... The introduction of such a tax is likely to reduce the long term influx of population into the state and hence to reduce the long term economic growth and development of the state. (Saltz 1998, 600) I. INTRODUCTION Recently, five states (1) have considered eliminating their personal income taxes (Blanton 2013; Lehrer 2013), and as the debate continues to flare, the effect of income taxes on an individual's residency choice remains heavily contested in the academic literature. Empirical evidence supports neoclassical economic theory and shows that income taxes deter workers, especially high income workers, from migrating to localities with large income tax burdens (Cebula 1990; Feld and Kirchgessner 2000; Feldstein and Wrobel 1998; Johnson 1988; Kleven, Landais, and Saez 2013; Saltz 1998; Simula and Trannoy 2010). However, numerous studies have also found that income taxes have little or no effect on residency choices (Coomes and Hoyt 2008; Day and Winer 2006; Liebig, Puhani, and Sousa-Poza 2006; Young and Varner 2011). In fact, in a recent survey of the relevant literature, the authors state that "tax flight is a myth [and] higher state taxes bring more revenue, not more migration" (Tannenwald, Shure, and Johnson 2011, 1). I contribute to the ongoing debate in the literature, isolating the pure effect of income taxes on residency decisions by removing many of the confounding factors, such as mobility restrictions and public goods provision, and thereby testing the hypothesis itself. Using data provided by the Department of Defense (2009a) on the number of military legal residencies in each state, this article provides evidence that states incur residency penalties because of their income tax policies. Military residency data provide a unique opportunity to isolate the distortionary effects of income taxes because military personnel may be stationed and physically living in one state while paying taxes in another. This allows service members to ignore common concerns, such as the provision of public goods, in making their residency decisions. I model the relationship using a zero inflated negative binomial and find that state income tax policies have a statistically significant and substantial impact on the number of military residents. States with no income tax or with exemptions for military wages are expected to have, respectively, 100% and 39% more service member residencies than states without exemptions. This effect increases as wages and tenure increase. Although most people will not be able (or desire) to remove mobility concerns and public goods provision from their residency decisions, this article suggests that state income taxes do have an effect on the residency decisions of service members. It also represents a potential upper bound on the effect of income taxes on the general population: what their behavior may be in the absence of other factors. Isolating the pure effect of income taxes on residency decisions is an important step in evaluating how people make decisions on where to locate. Not only is it important to test the theories; residency patterns also have serious impacts on states' fiscal health. Income tax revenue is vital to the 41 states that impose a personal income tax. Therefore, understanding how income tax affects behavior greatly benefits policymakers who are striving to craft tax systems in the best interest of their states and citizens. This analysis also sheds light on the impact that tax exemptions have on residency decisions, giving states more information on the finance tools available to them and how they influence revenue and migration. Further analysis on the effect of public goods and how citizens balance these often conflicting preferences will be of the utmost importance to policymakers. This research represents the first step in the systematic analysis of residency decisions. …