TED'S TAKE: COST OF LIVING VARIATION IMPACT ON POLICY

 The variation in cost of living across the country factors into recent discussions of the One Big Beautiful Bill but rarely gets any focus. I want to provide a few examples as to what it means and potentially its effects.

I’m not advocating one way or another; the point here is the value of the various deductions or their limits, are not equal across the country for taxpayers because the cost of living is different. It costs more to live in certain places. This raises the question – should these cost of living differences be considered and if so to what extent?

Because I worked in the Medicare space, I am going to use something well known for me - the Medicare Area Wage Index (AWI). This index is used to adjust Medicare payments to hospitals, physicians and other providers and applies to the labor portion of the payment –about 65% of Medicare payments that hospitals receive.

While the AWI is imperfect because of the wage data upon which it is based (the hospitals are surveyed and the focus on and knowledge of the survey influences their completion of the survey and therefore impacts the data) but it can serve as a proxy to illustrate the differences in cost of living. Again, this is for illustration only.

What follows are the approximate Medicare AWI values for select area on the country.

AWI by area

Baltimore, MD      -   .94

New York, NY      - 1.31

Boston, MA          - 1.31

Charlotte, NC       -   .92

Chicago, IL          - 1.01

Washington, DC  - 1.15

What you can see in these indexes is that the AWI for New York is 1.31. It costs 37 percentage points more to live in New York than say in Baltimore MD (1.31-.94). That means payments  to NY providers are roughly 37% higher to accommodate this labor portion of a Medicare payment.  Thus, assuming the above are an accurate reflection of the true cost of living, it would mean that a limit of $10,000 (or $20,000 or $30,000 or $40,000) for a deduction (at the federal level for an income tax deduction) would have less value to those in NY as opposed to those in Baltimore. Because federal income tax rules apply nationwide, this has an impact on tax policy for federal income tax purposes as there are several limits that apply on federal tax deductions.

This uniform application of deductions or limitations raises  questions of fairness and equity related to the deductions across the country. However, it gets complicated as the level of the cost of living differences is also influenced by how the various jurisdictions have elected to generate the tax revenues local governments need (which can increase the relative cost of living in some areas).

A few points for your consideration here:

1)  consider relative cost of living differences and the connection to tax policy;

2)  understand that local tax policy decisions influence the relative cost of living;

3)  should we and how could we construct a politically achievable path to accommodate these effects?

One thing is for sure: if its fair, it will never be simple.