AbstractThe ability of state and local governments to use tax and other fiscal policies to redistribute income may be limited when labor is mobile. An analysis of the allocative and distributional effects of a state income tax shows that, by driving out taxed households, the burden of the tax may be shifted to immobile households and other owners of immobile factors of production and may impose an excess burden on them. The NBER TAXSIM model is used to calculate state income tax burdens for representative high‐income households in 1986–1988. Further calculations based on assumed demand elasticities for labor indicate that if high‐income households are mobile, the marginal excess burden of income taxes imposed on them may be of substantial size in certain states, especially among the highest income g