Personal Income Taxes and Labor Downskilling : Evidence from 27 Million 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 technological skills required by firms when hiring workers (downskilling). Tax-induced downskilling is identified both at the county level and at individual firms' establishments. It is driven by taxes on middle-class earners. Multi-state firms internally reassign their hiring of low- vs. high-quality workers according to local personal income tax changes. Together with downskilling, firms cut IT investment and exit from localities that increase personal taxes. Our findings point to a "brain-drain'' in states with high personal income taxes, showing how taxes bear detrimental effects on the skill composition of local labor markets