State income taxes can influence where employers hire, but they rarely decide the question by themselves. The effect depends on whether the business is a C corporation or a pass-through, whether the relevant tax is imposed on the company or its owners, where the employee physically works, how wages are sourced, and what the employer gains or loses in wages, productivity, talent access and proximity to customers. A lower-tax state can be less attractive if it offers fewer qualified workers or weaker operating advantages; a higher-tax state can still win when its talent and productivity justify the cost.
What state income taxes actually change for an employer
State taxes affect hiring through several connected channels rather than one simple “high tax versus low tax” calculation.
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- Business-tax exposure: Corporate income taxes can change the after-tax return from locating establishments, payroll or other activity in a state.
- Owner-tax exposure: Personal income taxes can matter more to pass-through businesses whose profits flow to owners’ individual returns.
- Worker supply: Taxes change the net pay workers keep and can influence where some mobile workers choose to live or perform services.
- Compliance cost: Hiring someone who works in another state can create registration, withholding, filing, nexus and apportionment obligations.
- Location value: Taxes must be weighed against wages, productivity, labor availability, customers, suppliers and the benefits of working near an industry cluster.
The California Legislative Analyst’s Office (LAO) summarizes the central economic test this way: “At a basic level, an employer’s decision to hire a worker depends on the worker’s productivity relative to the costs of employing them.” A tax difference matters only insofar as it changes that comparison or the employer’s ability to recruit and retain people.
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Why the business structure changes the tax effect
Do not treat a state’s personal income-tax rate as if it were the employer’s corporate tax rate. The relationship differs by entity type.
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| Business form or activity | Tax relationship reported in the evidence | What it means for hiring decisions |
|---|---|---|
| C corporations | The U.S. Census Bureau working paper reports employment and establishment-count elasticities of -0.4 with respect to corporate taxes. Those measures did not vary with personal tax rates. | Corporate tax changes were associated with measurable changes in employment and the number of establishments in the study data. The estimate is an average relationship, not a prediction for every company. |
| Pass-through entities | The same Census study reports activity elasticities of -0.2 to -0.3 with respect to personal tax rates and says they were invariant to corporate tax rates. | Owner-level taxation can be more relevant than a corporate rate when profits pass through to individual owners. |
| Resources across states | The Census paper attributes about half of the observed tax effect to reallocation of productive resources to other states. | A tax response may involve shifting establishments, workers or other resources rather than eliminating activity altogether. |
In this context, an elasticity of -0.4 does not mean a company automatically cuts 40% of its jobs after a one-percentage-point tax change. It describes the estimated percentage response to a percentage change in the relevant tax measure in that study’s multi-state firm data. Actual responses depend on the company’s margins, mobility and alternatives.
How taxes can change the supply of workers
Personal income taxes can affect an employer even when the employer does not pay that tax directly. A worker compares after-tax pay, housing and other living costs, career opportunities and the value of a location. If a state’s tax system makes a job less attractive to a mobile candidate, the employer may have to offer higher gross pay, accept a smaller applicant pool or recruit remotely from elsewhere. Those are economic mechanisms, not universal outcomes for every occupation.
Highly mobile, high-earning workers
Evidence is strongest for groups that can move or choose where to perform work. Moretti and Wilson’s 2017 American Economic Review study of star scientists reports: “The long-run elasticity of mobility relative to taxes is 1.8 for personal income taxes, 1.9 for state corporate income tax, and —1.7 for the investment tax credit.” The population matters: star scientists are unusually mobile and highly paid, so the estimates should not be generalized to the entire workforce.
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Workers who travel or perform services across state lines
Agrawal and Tester’s 2024 study of professional golfers found that “the elasticity of working in a state is 0.34.” The result shows that state taxes can affect where labor is supplied even without a residence change. Professional golfers have an unusual work pattern, however; the finding is evidence of a channel, not a benchmark for ordinary office, retail or manufacturing jobs.
Gross pay is only one response
An employer facing a tax-sensitive labor market can respond with compensation, location flexibility, travel support, remote work or a different recruiting geography. Each option has a cost. A higher salary raises payroll expense, while remote hiring can expand the talent pool but add tax and payroll administration.
Remote hiring turns an employee’s location into a compliance issue
Remote work makes the worker’s physical location important even when the employer has no office there. The National Conference of State Legislatures (NCSL) explains that an employee working from another state can trigger jurisdiction-specific registration and legal duties. Depending on the state and the employer’s activities, the issues may include:
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- registering as an employer or doing business;
- withholding and remitting state payroll taxes;
- corporate income-tax nexus, filing and apportionment;
- sales and use taxes;
- property-tax exposure; and
- local tax or licensing obligations.
NCSL also notes that single-sales-factor apportionment and economic-nexus rules have reduced the effect that one remote worker may have on some employers’ corporate income-tax liability. That is not a universal safe harbor: the result depends on the state’s rules, the employer’s business and what the worker does.
Why one remote employee can have several tax answers
Residence, physical workdays, the assigned or primary office, the employer’s business activity and the reason for remote work can all matter. An employee may owe tax in a residence state, have wages sourced to an employer state under a convenience rule, or create employer duties in the work state. Reciprocal agreements can change withholding, but they do not erase every registration or business-tax question.
Convenience-of-the-employer rules: a New Jersey example
New Jersey illustrates why a national rule of thumb is unsafe. Its Division of Taxation says that, for covered nonresidents, “Under a Convenience of the Employer Rule, a nonresident taxpayer’s employee compensation from a New Jersey employer for the performance of personal services is sourced to the employer’s location in New Jersey if the employee is working from an out-of-state location (e.g. telecommuting from their resident state) for their own convenience, rather than for the necessity of their employer.” The FAQ was updated October 30, 2025.
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The treatment depends on facts such as the employee’s residence, assigned or primary office and whether working outside New Jersey is necessary for the employer. A person working from home because the employer requires that arrangement can be treated differently from someone who works remotely merely because it is personally convenient. This New Jersey approach is a state-specific example, not a rule that applies nationwide.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Productivity and clustering can outweigh a tax difference
A lower tax bill does not automatically produce a lower cost per useful unit of work. California’s LAO describes hiring as a comparison of productivity and employment costs and notes that higher wages can come with higher productivity. An employer may also value being near customers, suppliers, universities, specialized infrastructure or an industry cluster where workers and knowledge are concentrated.
Remote work changes that trade-off. It can let a California employer hire an out-of-state applicant without requiring relocation, expanding the candidate pool. But less in-person interaction can reduce agglomeration benefits that come from working near colleagues and related firms. The right comparison is therefore total value created per employee, not a state’s headline income-tax rate.
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California’s labor-market evidence
The LAO’s 2026 report provides a state-level illustration rather than a universal forecast. It estimates that, if heavily remote job groups had continued leaving California at their pre-pandemic rate, the state would have had around 100,000 more of those workers in 2024. The report attributes slightly more than half of the overall jobs gap to people moving into or out of California and the remainder to employers hiring applicants who live out of state. In discussing tax policy, the LAO warns: “For one, taxing remote income would make it more difficult for California employers to hire out-of-state remote workers.” These figures concern California’s labor market and heavily remote occupations, not all employers or all states.
A practical framework for comparing two hiring states
Use the following sequence when deciding whether to place a job, establishment or remote employee in one state rather than another.
- Identify the entity and tax base. Determine whether the employer is a C corporation, partnership, S corporation or another pass-through form. Separate corporate income-tax exposure from owner-level personal income-tax exposure.
- Map where work will physically occur. List each employee’s residence, expected workdays by state and assigned or primary office. Do not assume headquarters determines every tax result.
- Check sourcing and reciprocity rules. Review whether wages are sourced to the work state, residence state or employer state, and whether a convenience-of-employer rule or reciprocal agreement applies.
- List employer registrations and filings. Confirm payroll withholding, unemployment and other employer registrations, income-tax returns, sales/use-tax obligations, local taxes and any property-tax consequences.
- Estimate total labor economics. Compare gross wages, benefits, payroll taxes, recruiting costs, expected productivity, turnover and the size of the qualified labor pool.
- Value the operating location. Put a dollar or measurable output value on proximity to customers, suppliers, research institutions, transportation and industry clusters. Include the cost of lost collaboration if a remote arrangement replaces in-person work.
- Model alternatives. Compare a local hire, a remote hire, a satellite establishment and a contractor arrangement only after checking the legal classification and tax consequences of each.
- Recheck when facts change. A worker moving, adding workdays in another state, changing offices or becoming a manager can alter withholding, nexus and apportionment.
| Decision dimension | Questions to answer | Why it matters |
|---|---|---|
| Entity and tax base | Which entity earns the income, and who ultimately bears the tax? | The Census estimates show different responses for C corporations and pass-throughs. |
| Worker location | Where does the employee live and physically work, and what office is assigned? | Those facts can control wage sourcing and employer duties. |
| Compliance footprint | Will the hire require registration, withholding, returns or local filings? | Administrative cost and penalties can erase a nominal tax saving. |
| Total labor economics | What are wages, productivity, availability and turnover likely to be? | Tax is only one component of employment cost and output. |
| Operational value | Does being near customers, suppliers or a cluster improve results? | Location advantages may exceed the tax difference. |
Common mistakes employers should avoid
- “Employers always move to low-tax states.” The evidence supports tax sensitivity at the margin, with different responses by entity and worker group.
- Using a personal rate as a corporate rate. Corporate and pass-through businesses face different tax channels.
- Assuming the employee’s home state is the only taxing state. Residence, work location, reciprocity and convenience rules can interact.
- Counting only the statutory rate. Add wages, productivity, recruiting reach, compliance work and location benefits.
- Treating one remote worker as either harmless or automatically taxable everywhere. Nexus and apportionment depend on state law and the employer’s facts.
- Generalizing specialized studies. Star scientists and professional golfers are informative examples of mobility, not representative samples of every occupation.
- Relying on an old rule. Remote-work guidance and state sourcing laws change; verify the current rule before changing payroll or hiring geography.
What the evidence does—and does not—establish
The studies support a conditional conclusion. Taxes can influence business activity, establishment location and labor supply, especially where firms or workers are mobile. The Census estimates show different sensitivities for C corporations and pass-through entities. Moretti and Wilson show strong mobility responses among star scientists, while Agrawal and Tester find a smaller but measurable work-location response among professional golfers. NCSL and the New Jersey example show that remote hiring creates legal and administrative consequences beyond the worker’s paycheck.
None of these sources supplies a universal ranking of the best states for hiring. A sound decision requires the employer’s entity structure, employee locations, sourcing rules, compliance costs, labor-market data and operating needs. Tax should be modeled as one input to the productivity-and-cost decision, not used as a shortcut for it.
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