THE BLOG
11/19/2012 08:41 am ET Updated Jan 19, 2013

Not Everyone Who Makes $250,000 a Year Is Rich: Why the Cost of Living Matters

The inherent problem with allowing the Bush-era tax cuts to expire for Americans earning more than $250,000 a year -- let's call them $250k+ Americans -- is that not all $250k+ Americans are created equal.

Specifically, not all $250k+ Americans are rich, and those who are not should not have to see their taxes go up next year.

If you are a $250k+ American living in, say, Birmingham, Alabama, or Missoula, Montana, you are indeed affluent. If, on the other hand, you are a $250k+ American living in New York City, Chicago or Los Angeles, you are more upper middle class than wealthy.

This stark contrast should be taken into account in determining the base for any proposed tax increases. It would be unfair to put residents of New York City, Chicago, Princeton, New Jersey, and other high cost of living areas of the country who earn $250,000 a year into a higher tax bracket just because others making that amount in places like Missoula are legitimately considered to be very well off. As a matter of fundamental fairness, the higher tax bracket should instead start at around $540,000, which happens to be the rough Boston, Mass. equivalent of an annual income of $250,000 in Cleveland, Ohio.

I write as a Democrat who strongly supported President Obama's re-election bid. At the same time, as members of the Obama administration and Republican Congressional leaders begin negotiations to avert going off the "fiscal cliff," some conceptual fine tuning seems in order.

Both sides of the debate over whether $250k+ Americans should continue to enjoy the same tax breaks given to Americans with annual incomes of less than $250,000 are overlooking a crucial piece of the puzzle, namely the very real cost of living differentials that exist across the United States. According to the CNN Money website, "You would need $545k in New York to maintain the same lifestyle that $250k affords in Missoula, Mont."

While earning $250,000 a year in Missoula, would unquestionably qualify one as wealthy, that is the equivalent of an annual income of $1,080,041.13 in New York City; of $773,078.89 in Boston; and of $520,072.888 in Los Angeles. Along the same lines, an annual income of $250,000 in Milwaukee, Wisconsin, is comparable to $806,000.23 in New York City and $576,924.10 in Boston; and making $250,000 in Birmingham, Alabama is equivalent to $540,768.24 in Boston.

Conversely, earning $250,000 a year in a high cost of living location such as New York City would be like making $118,988.77 in Dallas, Texas; $77,543.40 in Milwaukee; and just $57,868.17 in Missoula.

My point -- not an original one by any means -- is that many $250k+ Americans in high cost of living locations, especially if they have families that include several school or college age children, are not, and should not be considered, wealthy. Simply put, therefore, applying the $250k+ figure uniformly throughout the United States would be unfair to and onerous for those individuals or couples who earn $250,000 a year but live in a high cost of living city or state.

To fully understand the implications of not taking cost of living differentials into account when formulating national tax policy, it is important to bear in mind that the average monthly rent for a 900 square foot apartment in New York City is estimated at $3,634. A similar apartment goes for $2,053 in Los Angeles; $1,573, in Chicago; $1,064 in Cleveland; and $850 in Boise, Idaho. In other words, the rent for a comparable apartment in Boise is 77 percent less than in New York City.

Other basic costs also vary dramatically from location to location. As of July of this year, 30-day MetroCards in New York City cost $104, almost 29 percent more than monthly public transit passes in San Francisco which went for $74. Comparable monthly public transportation costs are $85 in Chicago; $52 in Cleveland; $36 in Boise; and $15 in Birmingham, Alabama -- that is, 86 percent less than the 30-day New York City MetroCard.

The estimated daily cost of bread for two people is $2.83 in New York City; $2.52 in Boston; $1.62 in Milwaukee; $1.50 in Cleveland; and $0.60 -- 60 cents -- in Birmingham.

The price of one quart, or one liter, of whole milk is $2.63 in New York City. The same quart of milk will cost you $2.42 in Boston; $2.27 in Cleveland; and $1.76 in Milwaukee.

The fairest alternative to applying a uniform $250,000 standard across the board would probably be to index the $250k+ threshold figure to a middle-America location such as, for example, Cleveland, and then adjust this amount for cost of living variation according to the tax payer's residence, in which case the higher bracket might start at around $750,000 in New York City (rounded down from $759,269.02); $600,000 in Washington, D.C., (rounded down from $618,725.12); and $540,000 in Boston (rounded down from $543,474.53). Such an approach, however, would be utterly impracticable and unrealistic given the nationwide uniform application of tax code criteria.

Accordingly, a viable compromise solution might be to impose the new higher tax bracket across the board on incomes starting at, for instance, $540,000 on the rationale that such an annual income in a location like Boston (not the highest cost of living area in the country) would be the approximate equivalent of $250,000 in a place like Cleveland or, for that matter, Birmingham, Alabama. While still weighted against residents of the highest cost of living locations such as New York City, doing so would be less inequitable than the presently contemplated across-the-board $250k+ proposal.

This approach would retain $250,000 as the conceptual base for the higher tax bracket, but with that figure adjusted to take cost of living differentials into account at least to some extent so that the increased tax burden would fall, as President Obama intends it to, on those Americans who are truly affluent rather than on those who might be earning $250,000 a year but who, because of where they happen to live, should not be classified as "wealthy."

Menachem Z. Rosensaft is adjunct professor of law at Cornell Law School, lecturer in law at Columbia Law School, and distinguished visiting lecturer at Syracuse University College of Law.

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