Tuesday, December 15, 2015

Adjusting Wages for the Cost of Living and Taxes


Scott Smith, Regional Economist 

Workforce Services analysts have previously written about Regional Price Parities and how local costs of living differ because of geographic differences and scarcities. The U.S. Bureau of Economic Analysis calculates Regional Price Parities (RPPs) accounting for the cost of living differences across specific locations. RPPs measure the differences in the price levels of goods and services across state and metropolitan areas for a given year. RPPs are expressed as a percentage of the overall national price level, with the national average equaling 100.
Another factor that can be adjusted for when comparing costs of living across areas is federal taxation. Higher nominal incomes are subject to higher tax rates. People in “high income” New York City should pay more in federal taxes than people in “lower income” areas like Logan, Utah. When one looks across different regions, not only can the differing cost of goods and services be adjusted for RPP, but the additional loss in taxes may also be considered.
Table 1 shows median wages[1] from large and very small metropolitan statistical areas adjusted for purchasing power and taxes.

Table 1

Purchasing Power and Tax Adjusted Wages for Selected Areas

Median Wage
Spread  Above SLC
Excess Tax Due
  After Tax Income
RPP
After Tax Wages
Chicago-Joliet-Naperville, IL Metropolitan Division
37,950
2,170
217
37,733
106.6
35,397
Coeur d'Alene, ID
30,440
-5,340
-534
30,974
92.8
33,377
Houston-Sugar Land-Baytown, TX
36,880
1,100
110
36,770
100.6
36,551
Logan, UT-ID
29,010
-6,770
-677
29,687
90.6
32,767
Los Angeles-Long Beach-Glendale, CA  Metropolitan Division
38,100
2,320
232
37,868
117.7
32,173
Manhattan, KS
30,970
-4,810
-481
31,451
92.8
33,891
Mansfield, OH
29,590
-6,190
-619
30,209
88
34,328
New York-White Plains-Wayne, NY-NJ Metropolitan Division
45,200
9,420
942
44,258
122.3
36,188
Ogden-Clearfield, UT
33,120
-2,660
-266
33,386
95.9
34,813
Provo-Orem, UT
31,100
-4,680
-468
31,568
97.3
32,444
Salisbury, MD
31,370
-4,410
-441
31,811
89.8
35,424
Salt Lake City, UT
35,780
0
0
35,780
99.7
35,888
St. George, UT
28,990
-6,790
-679
29,669
94.3
31,462
St. Joseph, MO-KS
29,410
-6,370
-637
30,047
89.2
33,685
Washington-Arlington-Alexandria, DC-VA-MD-WV Metropolitan Division
51,120
15,340
1,710
49,410
119.8
41,244

Source: BLS,BEA



Federal income taxes were calculated assuming that each worker files as an individual with one exemption and takes the standard deduction. State and local taxes were ignored for the following reasons:

·         State and local taxes are used mostly for the provision of public services (although state matches for Medicaid are a large item in state budgets). Public services such as roads, education and public safety may be thought of as “goods” and therefore a consumption choice. Further, many states (such as Texas) rely on other taxes for funding.

·         With the exception of defense spending, the majority of federal expenditures are devoted to social insurance such as Medicaid and Medicare. Someone once quipped that the federal government was an insurance company with an army attached. Social Insurance is not generally considered a public good.
For the purpose of demonstration, the spread of wages relative to Salt Lake City are calculated yielding the extra federal tax or credit. The Salt Lake City wage was selected for purposes of exposition only. The relative rankings would be the same using the U.S. median as an average.
Table 2 shows those ranking before and after the adjustment for taxes.

Table 2

Area Wages after RPP and Taxes

RPP
After
Adjusted
Tax
Wage
Rank
Wages
Rank
Washington-Arlington-Alexandria, DC-VA-MD-WV Metropolitan Division
42,671
1
41,244
1
Houston-Sugar Land-Baytown, TX
36,660
3
36,551
2
New York-White Plains-Wayne, NY-NJ Metropolitan Division
36,958
2
36,188
3
Salt Lake City, UT
35,888
4
35,888
4
Salisbury, MD
34,933
6
35,424
5
Chicago-Joliet-Naperville, IL Metropolitan Division
35,600
5
35,397
6
Ogden-Clearfield, UT
34,536
7
34,813
7
Mansfield, OH
33,625
8
34,328
8
Manhattan, KS
33,373
9
33,891
9
St. Joseph, MO-KS
32,971
10
33,685
10
Coeur d'Alene, ID
32,802
11
33,377
11
Logan, UT-ID
32,020
13
32,767
12
Provo-Orem, UT
31,963
14
32,444
13
Los Angeles-Long Beach-Glendale, CA  Metropolitan Division
32,370
12
32,173
14
St. George, UT
30,742
15
31,462
15

Note that Washington D.C. is an outlier. The reason for the high District of Columbia wage is that the federal government workforce is highly educated; 49 percent of the District workforce holds a bachelor’s degree or more. The comparable statistic for the U.S. is 25 percent.
The largest wage corrections between cities come through cost-of-living adjustments. But taking the additional step of adjusting for extra taxes paid further reduces the real income spread between cities. Excluding the District, the RPP adjusted pretax spread between the highest and lowest wage is 19 percent. By further adjusting for taxes, the spread reduces to 16 percent.

As for Utah, the statistics show that Salt Lake City’s after tax wage is extremely favorable. In fact, the difference between high wage New York City and Salt Lake City is only 0.8 percent. Similarly, Ogden’s median wage is only slightly less than Chicago’s. Provo’s adjusted wage is 0.8 better than Los Angeles, while St. George’s wage is only 2.2 percent less favorable.
Finally, one should not confuse the purchasing power wages as a proxy for quality-of-life. There are non-monetary aspects that need to be taken into account when evaluating differing cities or regions. Residents of St. George could argue that they are additionally being “paid in sunshine” and, given the robust population growth in this area, many feel well compensated.



[1] Median vs. per capita wages is chosen because the per capita measure distorts the wage picture because of Utah demographics.

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