This paper studies the interstate effects of decentralized taxation and spending when individuals can work from home (WFH), a possibility that decouples a state’s population and employment levels. Our main findings show that a shift from a non-WFH economy to WFH reduces employment and raises the wage in high-tax states, with larger effects under source taxation. Once WHF is established, an increase in a state’s tax rate either reduces employ- ment further while raising the wage (source taxation) or leaves the labor market unaffected (residence taxation). We show that the residence-taxation equilibrium is efficient.