COST OF LIVING VARIATION: WHY FEDERAL POLICY ISN’T ONE-SIZE-FITS-ALL
- Margarita Kilpatrick
- Jul 22
- 3 min read
Across the country, the cost of living looks very different.
What it takes to live in New York City isn’t the same as what it takes to live in Charlotte. But when it comes to federal tax deductions, Medicare policy, and national funding structures, we often treat every place and every taxpayer as if they’re operating in the same economy.
They’re not. This cost-of-living variation rarely gets the attention it deserves in federal policymaking. But it should, because it influences how effective a policy actually is. If the real-world value of a deduction or payment changes depending on where you live, then so does the fairness of that policy. Let me walk you through an example I know well.
THE MEDICARE AREA WAGE INDEX: A WINDOW INTO REGIONAL COST DIFFERENCES
Before I founded the JKTG Foundation, I spent years working in health policy, specifically around Medicare. One tool Medicare uses to account for regional cost variation is the Area Wage Index (AWI).
The AWI adjusts payments to hospitals, physicians, and providers based on local labor costs. Labor accounts for about 65% of a hospital’s Medicare payment, so this adjustment matters a lot. Is the AWI perfect? No. It’s based on self-reported data from hospitals, which introduces bias. But it still gives us a useful lens into how differently healthcare delivery costs play out across the country.
Take a look at these illustrative AWI values:
So what does this mean? The labor portion of a Medicare payment to a New York hospital is adjusted 37% higher than that to a hospital in Baltimore. That’s a huge difference. And it reflects the very real fact that salaries, staffing, and general operations cost more in New York than they do in Baltimore.
Medicare accounts for that. Our tax code doesn’t.
APPLYING THAT SAME LOGIC TO TAX POLICY
Now imagine you're a taxpayer in New York and a taxpayer in Baltimore. You both hit the $10,000 cap on a federal tax deduction. On paper, that’s equal. But in practice, the real value of that deduction is lower for the New Yorker, who faces higher local costs for housing, food, transportation, and everything else. They’re paying more to get the same benefit.
That’s the issue with uniform national tax caps or deductions. They may appear fair, but their impact is anything but.
The cost of living variation means that:
A $10K cap helps some taxpayers more than others.
Federal deductions can unintentionally penalize high-cost regions.
Economic policy ends up being less about equity and more about location luck.
THE LOCAL POLICY FACTOR
There’s another layer to this that often gets ignored: local taxation.
Cities and states generate revenue in different ways. Property taxes, income taxes, sales taxes. These decisions directly affect the total cost of living for residents. So when federal policy ignores local context, it’s not just missing part of the picture. It’s potentially compounding the problem.
For example, a state with no income tax may rely more heavily on regressive sales taxes, which affect lower-income residents more. Meanwhile, a high-income-tax state may offer broader public services but also increase the burden on middle- and upper-income households. Both systems come with tradeoffs, but federal policy doesn’t account for any of them.
THE FAIRNESS PROBLEM
So where does that leave us?
With a system where “equal treatment” often results in unequal outcomes. And that’s a problem for any policy that claims to be fair, sustainable, or efficient. I’m not suggesting we create thousands of regional tax codes. But we do need to start asking tougher questions:
Should federal deductions be adjusted based on cost-of-living indexes, like the AWI?
Should income thresholds or deduction limits be geographically indexed?
Can we design a politically achievable model that recognizes local variation without creating unworkable complexity?
THREE QUESTIONS WORTH ASKING
How can national tax policy account for regional cost-of-living differences?
What’s the tradeoff between administrative simplicity and real-world fairness?
Can federal policies be adapted without becoming politically or technically impossible to implement?
These aren’t simple questions. But they’re not optional either. Because every time we ignore the cost-of-living variation, we create hidden winners and losers. And we pretend the policy is fair when it’s not.
FINAL TAKE
Federal rules that apply equally across 50 states may look good on paper. But if they don’t reflect how the world actually works, they’re not good policy. Whether we’re talking about Medicare payments or income tax deductions, we need to acknowledge that where you live matters and build smarter systems accordingly.
Because as I’ve said before: If it’s fair, it will never be simple.
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