Why big skies don't need a big paycheck

It is April and I dream of Montana. I dream of Big Sky and the 11,166-foot Lone Mountain. I dream of Flathead Lakes and large-mouth bass. And I dream of acreage, endless acreage.

This ranch-in-Montana fantasy is a common one for the American male - and even some females. Dwellers in big, expensive cities know they are missing something that goes beyond a vacation-oriented lifestyle, although they cannot always articulate what. That something is the greater purchasing power of people who live in cheaper places like Montana.

Their trouble is not merely cost of living, although that is a large factor. It is also a more complicated syndrome we will dub the San Francisco Squeeze. The squeeze is the consequence of being caught between two things: the high cost of living in big cities on the one hand and the progressive structure of the US tax code on the other.

As everyone knows, you need a much higher income to maintain the same style of life in Boston than you need in, say, Joplin, Missouri, or Great Falls, Montana.

But the extra income that represents your cost-of-living adjustment also pushes you into a higher tax bracket. US tax brackets are adjusted for inflation, but they are not adjusted for differences in the cost of living in different places. So a good share of that "extra money" goes to your national capital, not you.

Recently the Tax Foundation in Washington developed a squeeze meter for US cities. It started with a simple geographic cost-of-living index, the sort personnel departments in big corporations use. Then it looked at the tax burdens shouldered by those with nominally higher wages in high-cost cities. The foundation found that the progressive rate structure overcharges people who live in high-cost cities while undercharging those in low-cost areas. (The study did not look at state and local taxes, although these also affect after-tax income and, of course, relocation decisions).

The differences are striking. In New York, a married couple needs $159,621 in income to achieve the median US standard of living. That nominal income means the family's effective federal tax rate is something like 20 per cent. In Mobile, Alabama, it takes only

$65,452 to get the average American lifestyle. That couple's federal tax burden is merely 10 per cent. Another example: an income of $132,000 in San Francisco brings you about the same value that you get for a mere $84,111 in Portland, Oregon, also a highly livable port city. But in San Francisco a family pays over $22,000 in federal tax on that income, whereas in Portland they pay less than $11,000.

New York City, parts of New Jersey, San Francisco, San Jose and Honolulu won the contest for worst squeezed by the Tax Foundation's meter, ranking 1-5. Among the best areas were Jacksonville, Florida, Phoenix, Arizona, and Pocatello, Idaho.

And, of course, there is Montana, where I can have five bedrooms with a mountain view, a barn and fields for the dog to ramble across. Montana begins to sound attractive, especially when you consider that for the same purchase price, $525,000, you can get a one-bedroom shoe box, if that, in Manhattan.

The squeeze has a political context. When presidential candidate John Kerry says that he will raise taxes on the "wealthy", he is, to a serious extent, targeting the cost-of-living challenged (the squeezed). Last Monday I published a column saying that some of the top earners in America didn't feel rich. Two groups didn't like that assertion: unswerving partisans of Mr Kerry and people in not-so-costly places. The mail from expensive places - California, say - was by contrast generally positive. I got a letter from the wife of a doctor with a practice in an expensive town (Hinsdale, Illinois). A mother of four, she was working towards her nursing degree, but was having a hard time doing it; the taxes plus the cost of living made things a struggle. She was so angry she called Democrats "sheep in socialists' clothing" - hard language for someone from the caring professions.

But the story is not merely an American one. People transferring to the US will also want to take into account the progressive federal rate structure - or at least be sure that whoever calculated their Cost of Living Allowance did. They might also bear in mind the relative burdens of various state taxes. (The Tax Foundation has charts on these too.)

But back to the Tax Foundation report. Put most simply, what it says is that we can get a nicer house than we have and cut back on work, all without sacrificing standard of living.

Montana, here we come.

© Copyright 2004 Financial Times

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