Abstract This paper indicates the response of a metropolitan area to the levying of a local income tax. The analysis is focused on a central city and its surrounding suburbs but allows for migration to and from the metropolitan area. Of primary interest are the spatial effects of local income taxation and the associated welfare costs derived from additional transportation expenditures. The analysis indicates the forms of compensation to central city high-income households for the fiscal deficit they bear. Changes in wage rates and land rentals are derived and the question of full capitalization is considered.