HR and relocation professionals should be cognizant of the impact state and local taxes can have on cost-of-living differentials. A move from a state with no state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) to a state with one of the highest rates (California, Hawaii, New Jersey, New York, and Oregon), can significantly affect cost-of-living differentials. Further, intra-state moves in states with local tax obligations (Alabama, Colorado, Indiana, Kentucky, Maryland, Missouri, New York, Ohio, and Pennsylvania) can result in differences between various locations within the state. Although any one individual’s tax liability is unknown, it is important to include a reasonable estimated tax differential while discussing cost-of-living details involved in relocations.
Below are three examples to illustrate the impact that state and local taxes can have on cost of living, depicting both increasing and decreasing differentials.
In a move from the NYC metro area of Westchester, NY, to Dallas, TX, (Note: NYC has a 4.25% local income tax, while all other cities impose no local income tax) assuming a single employee with annual earnings of $125,000, renting a 900 square foot apartment, the decrease in estimated taxes is $7,981 (almost half of the total 16.6% decrease in cost of living!). Texas has some of the highest property tax rates in the county, so a relocating homeowner’s differential might vary. The company’s responsibility, however, is to replicate the current base city lifestyle (renting).
Consider a couple relocating from Seattle, WA, to Baltimore, MD, renting a 1,000 square foot apartment with the relocating employee earning $96,000. The income and payroll tax difference of $8,448 in Baltimore more than offsets the decreases in consumables, transportation, health services and housing expenses between the two locations. The State of Maryland taxes its residents using seven brackets ranging from 2% to 5.5%. The city of Baltimore levies a 3.2% income tax on residents, and every county in Maryland imposes a local “piggyback” income tax rate ranging between 1.25% and 3.2%.
The last example may prove surprising: an intra-state relocation of a family of three with annual earnings of $72,000. Municipalities and school districts in Pennsylvania can impose an earned income tax, a local services tax, and a personal income tax (the majority of the total of the three taxes range between 1% to 2%). The City of Philadelphia imposes a 3.93% tax while McKeesport has a mere 1% tax (nearby Pittsburgh, however, has a 3% combined tax). The difference of $2,110 in taxes could be a deal breaker in the relocation.
As detailed in the examples, income and payroll tax differentials can affect cost-of-living calculations. HR and relocation professionals are responsible for providing accurate data for management-level decisions and individual relocations. It is prudent to be aware of tax differentials and to use cost-of-living data that include these figures. Ignoring tax differentials can increase business costs due to declined relocation offers and failed relocation placements.