Local Taxes and the Demand for Skilled Labor: Evidence from Job Postings

Using big data on the near-universe of US firms' job postings, we document measurable, negative effects of local personal income taxes on the level of education, experience, and professional skills demanded by firms when hiring workers (downskilling). Tax-induced downskilling is identified both at the county level and at individual firms' local branches. It is solely driven by changes in high-income earners' tax rates. Multi-state firms internally reassign their hiring of low- vs. high-quality workers according to local personal income tax movements. The effect is more pronounced in industries that rely less on skilled labor and on local resources in the production processes, yet mitigated in firms' headquarter states and states that account for a large fraction of sales. Critically, firms cut investment and exit the labor markets of states that increase personal taxes. Our findings point to a "brain-drain" in states with high personal income taxes, showing how those taxes influence the local demand for human capital and labor market composition.