November 21, 2016

Albany Times-Union: There’s another way people in expensive cities are ‘penalized,’ and they might not know it

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“Part of the reason why Albouy’s ideas have not caught on is that it would be complicated. 

‘It would add incredible complexity to the tax code,’ said Matthew Gardner, senior fellow with the Institute on Taxation and Economic Policy.

There are many good reasons, he said, why things cost more in New York than they do in rural Nebraska. There’s more to offer in New York, and more people want to live there, which creates scarcity of housing and other goods. That means employers have to pay workers more there.

But the tax code doesn’t know any of that. ‘The income-tax laws are obviously blind to what’s driving your wages,’ he said. ‘All your income tax laws know is that you’re earning more.’

So the question becomes where do you draw the line. Do you base tax rates on each state’s average wages? If so, you lose the stark differences between New York City pay and what workers upstate earn. 

Or you could have two sets of tax brackets, one for those living in urban areas and another for those in the country. But that is a ‘blunt instrument,’ Gardner said, and could create new inequalities. How do you distinguish between those who choose to live in an expensive city, and those who are stuck in one?

Just as city dwellers today might feel like they’re subsidizing the rest of the country, changing the tax code might create resentment in the opposite direction.

‘It’s hard to think of a mechanism for alleviating geographic differences in cost of living that wouldn’t add as many inequities as it would solve,’ he said.

And, Gardner said, wealthier residents of expensive cities already get tax breaks that make it easier to live there. The mortgage-interest tax deduction, for instance, incentivizes homeownership in places with astronomical home prices, like San Francisco. And state and local taxes are deductible from federal returns. 

‘There are people who argue and look at the itemized deductions for state/local taxes and mortgage interest, and view it as insane subsidy for people who live in high cost areas,’ he said.

And, he said, there are only a few cities where cost of living is significantly higher than elsewhere, which raises the question of whether state and local governments should be responsible for reducing tax burdens.”

 Part of the reason why Albouy’s ideas have not caught on is that it would be complicated. 
“It would add incredible complexity to the tax code,” said Matthew Gardner, senior fellow with the Institute on Taxation and Economic Policy.
There are many good reasons, he said, why things cost more in New York than they do in rural Nebraska. There’s more to offer in New York, and more people want to live there, which creates scarcity of housing and other goods. That means employers have to pay workers more there.
But the tax code doesn’t know any of that. “The income-tax laws are obviously blind to what’s driving your wages,” he said. “All your income tax laws know is that you’re earning more.”
So the question becomes where do you draw the line. Do you base tax rates on each state’s average wages? If so, you lose the stark differences between New York City pay and what workers upstate earn. 
Or you could have two sets of tax brackets, one for those living in urban areas and another for those in the country. But that is a “blunt instrument,” Gardner said, and could create new inequalities. How do you distinguish between those who choose to live in an expensive city, and those who are stuck in one?
Just as city dwellers today might feel like they’re subsidizing the rest of the country, changing the tax code might create resentment in the opposite direction.
“It’s hard to think of a mechanism for alleviating geographic differences in cost of living that wouldn’t add as many inequities as it would solve,” he said.
And, Gardner said, wealthier residents of expensive cities already get tax breaks that make it easier to live there. The mortgage-interest tax deduction, for instance, incentivizes homeownership in places with astronomical home prices, like San Francisco. And state and local taxes are deductible from federal returns. 
FullSizeRenderKate Swelstad”There are people who argue and look at the itemized deductions for state/local taxes and mortgage interest, and view it as insane subsidy for people who live in high cost areas,” he said.
And, he said, there are only a few cities where cost of living is significantly higher than elsewhere, which raises the question of whether state and local governments should be responsible for reducing tax burdens. 

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