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In this article, we use data from the American states from 1996 to 2008 to explore the effects of immigration on income inequality. Empirical evidence from both static and dynamic models shows that the foreign-born population has a strong positive effect on state-level income inequality, even when we control for a range of federal and state political and economic contextual variables. We also find that the positive relationship between immigration and state income inequality is driven primarily by low-skill immigrants (rather than high-skill immigrants), and we provide some evidence that high-skill immigrants lower income inequality for some segments of the income distribution. We conclude that immigration—particularly low-skilled immigration—has an important effect on income inequality in the American states.