We examines how labor mobility influences municipal financing decisions, particularly the balance between debt and taxation. Using Annual Comprehensive Financial Reports from the 1,200 largest U.S. cities spanning 2008-2021, we find that net labor in-migration leads municipalities to increase tax rates while reducing debt reliance. We develop a theoretical model demonstrating that the tax elasticity of labor mobility critically determines financing choices. When mobility is highly tax-sensitive, municipalities favor debt financing to avoid tax-induced out-migration. When mobility is highly tax-sensitive, municipalities favor debt financing to avoid tax-induced out-migration. When mobility is less elastic, municipalities can rely more on taxation. Our calibration reveals that labor mobility is relatively inelastic to tax changes, explaining the observed reduction in municipal leverage following in-migration. Two competing mechanisms emerge: labor influx increases service demand, raising fiscal pressures, while simultaneously expanding the tax base and enhancing revenue capacity. When tax elasticity is inelastic, the tax base expansion effect dominates, resulting in net debt reduction. These findings illuminate how municipalities strategically adapt their financing mix based on labor mobility patterns.
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