In December, the state Department of Labor released the latest in a series of reports on the so-called “livable wage” in Maine.

This effort to calculate the cost of a “basic needs budget” was undertaken from 1999 to 2006 by the Maine Center for Economic Policy (MECEP), a nonprofit research organization based in Augusta. Using a variety of sources, MECEP calculated the costs in each of Maine’s counties for eight categories of household expenditures — food, rent/utilities, telephone, health care, transportation, child care, clothing/household/personal care items and state and federal taxes.

In 2007, the Legislature charged the Department of Labor with the task, and the report for 2010 released last month is the first one issued by state officials.

On an emotional level, the report has the appeal of a Brian Wilson megahit — “Wouldn’t It be Nice.” And in that vein, it has often been used as one of the arguments for increasing the minimum wage.

Apart from such political purposes, however, the report represents a useful exercise in benchmarking the cost of living and relating it to the actual wages paid in particular industries and regions.

The report can serve as a development metric — a way to see where a region or industry actually stands compared to where it needs to be to consider itself sustainable, or at least not precariously marginal.

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In this regard, it is useful to compare two regional extremes — York and Washington counties.

For a single adult with two children, the “livable wage” in York County in 2010 was calculated to be $47,901. In Washington County, the figure was $43,968, a difference of $3,933.

Drilling into the numbers, it is interesting to see what causes the difference. In York County, rent and utilities are $2,256 more expensive, state and federal taxes are $1,185 higher and child-care costs $492 more.

All the other items cost the same in both locations, or at least the sources the data are gathered from say they are the same.

This deconstruction of the elements of the “livable wage” reveals a seldom noted aspect of our system of paying for government programs — its impact on the basic cost of living.

The one adult, two-child household has to earn $3,933 per year more in York County than in Washington County, first to pay the higher rent and second to cover the higher taxes due on the extra earnings required to pay for the higher rent. The combination of a progressive income tax and a regressive payroll tax creates a large increase in the marginal tax rate.

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Based purely on consumption items, the “livable wage” income in York County for this family is $42,397, $2,748 more than in Washington County.

But in earning this extra $2,748, the family in York County has to cover not merely the higher rent and child-care costs but also the higher income and payroll taxes.

These taxes on the $39,649 “livable budget” in Washington County amount to $4,319 or 11 percent. On the $42,347 “livable budget” in York County, the same taxes amount to $5,504, or 13 percent.

A jump in tax rate from 11 percent to 13 percent doesn’t seem like much, but at the margin its true impact is seen more clearly. The difference between the $5,504 tax liability of the York County family and the $4,319 liability of the Washington County family is $1,185. This amounts to 30 percent of the extra $3,933 the York County family has to earn to meet its “livable wage” standard.

In short, the marginal tax rate on the extra earnings required to meet the higher rent and child-care expenses in York County is 30 percent.

None of this analysis, of course, has anything to do with what employers can or will pay in wages. That decision is made in light of the competitive and technological forces bearing down on all the businesses in York and Washington counties.

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It does, however, highlight the profound consequences on the lives of ordinary people of our current system of paying for health care and retirement — Medicare and Social Security — through regressive taxes on employers and workers. It also underscores the effects of our current system of paying for the ever-growing array of other federal and state government programs through a narrow-based, loophole-riddled, progressive income tax whose increasing marginal rates reach far down the income ladder.

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at:

clawton@maine.rr.com

 


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