Costs and tax brackets

Date posted: December 28, 2011

There’s a debate brewing about taxes that hasn’t yet bubbled to the surface but is, nevertheless, interesting. The argument is that because prices and costs aren’t the same in all regions of the country, tax brackets — which are the same everywhere — aren’t fair. N.C. State University economist Mike Walden examines the issue.

“Well … let’s, let’s say you’re comparing the cost of living in New York City or … D.C. to the cost of living in Raleigh or Wilmington or Ahoskie. I think most reasonable people would say that it … costs more to live in New York City or another big city like D.C. than it does in Raleigh, Wilmington or Ahoskie. So, for example, if you earned $150,000, that $150,000 isn’t going to go as far in New York City as it does in Ahoskie, North Carolina.

“So… that’s the premise that I think everyone would agree to. The problem, as some point out, is that when you look at the federal income tax — and remember the federal income tax has different tax rates depending on the level of your income, so the more you make the higher the tax rate that you pay — the federal income tax and its tax brackets don’t take into account differences in the cost of living.

“So those federal tax brackets treat $150,000 of income in New York City earned by someone in New York City the same as $150,000 dollars by someone in Ahoskie. And what some are saying — and where you’re particularly hearing this (is) from elected representatives, say, from New York City — they’re saying, ‘Well, that’s not fair that New York City residents should have their tax brackets adjusted to account for the higher cost of living.’

“There’s actually been legislation presented in Congress to … do this — to make the tax brackets different for different regions of the country based on this idea. My guess is this is not going to go very far. This doesn’t have traction at least right now.

“Still, though, it’s an interesting point to realize. And it does, I think, reinforce the idea that where you live in part determines how much it costs you to be there.”

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