Does state tax reciprocity affect interstate commuting? Evidence from a natural experiment

Abstract

This paper exploits the 2010 dissolution of the personal income tax reciprocity agreement between Minnesota and Wisconsin to estimate how state tax policies affect interstate commuting. This policy shock increased tax liability for some commuters and tax compliance costs for all commuters. Using a synthetic control approach designed for panel data, we compare the interstate commuting behavior of Wisconsinites and Minnesotans to unaffected intrastate commuters who live and work in the same state, intrastate commuters who live in other large metro areas, and several multi-state metro areas in other states where income tax reciprocity remained intact. Post-dissolution, we find robust evidence that the number of interstate commuters in Wisconsin border counties falls between 3 and 5%, with stronger declines found for younger and middle-income workers.