Abstract
Employees, including public employees, have been taking increasing portions of their compensation in the form of fringe benefits in order to avoid, or at least postpone, paying income taxes. Focusing on state income taxes paid by policemen and firemen, this paper estimates the effect of variation in the rates of such taxes on the form of compensation. This method avoids a potential bias found in studies that estimate the effect of the federal income tax on fringe benefits. The results show that police officers and firefighters do indeed respond to differences in state income tax rates, and that the combined effect of state and federal income taxes amounts to a fairly large deadweight loss associated with state income taxes if compared to the revenue collected.
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