Kenan Fikri is a senior research assistant at the Brookings Institution Metropolitan Policy Program.
A New Year’s payroll tax hike would hit 'working stiff' metro areas the hardest
Hiking payroll taxes on the country’s working stiffs in the middle of a fledgling recovery—let alone during the holidays!—might not be smart macroeconomic policy, but in Washington’s new “sur-reality” the prospect looms on the horizon. Should this occur, which places would be hit hardest by the expiration of payroll tax relief?
Individuals derive their income from three sources: Earnings for paid labor, investment income, and government transfers. Metropolitan area economies in which larger shares of total personal income are derived from earnings—the working stiff metros—are the ones that stand to take a disproportionate blow from Congressional inaction to extend the payroll tax cut.
The map below uses Bureau of Economic Analysis data from 2010 to break the country’s 100 largest metropolitan areas into five groups according to the share of earnings in total area income. Workers win more of the bread in the blue metro areas and less in the red ones. Since the payroll tax hike would be levied against a larger share of total income in the blue working stiff metros, they stand to take the hardest hit.
Brookings Metropolitan Policy Program
Working stiff metros are neither uniformly white- nor blue-collar and can be found in every region of the country. Many have performed well over the recession and the recovery, but some have notably struggled.
Workers are the greatest breadwinners in high-wage, hyper-educated Washington, D.C., where they pull in fully 75.4 percent of all metro area income. Rounding out the top five are Houston, Denver, Nashville, and Dallas. A large federal government presence empowers breadwinners in Colorado Springs, Ogden, and Virginia Beach. Austin and San Jose represent a skilled and tech-y contingent. Des Moines and Worcester have had strong recoveries; Charlotte and Memphis, weaker ones. A number of other state capitals with diverse industrial bases round out the top 20: Atlanta, Columbus, Honolulu, Indianapolis, Raleigh, and Salt Lake City. Incomes (followed by spending) in these metros would feel the biggest impact from a payroll tax hike—a dose of anti-stimulus that could undermine their otherwise strong recoveries.
Relatively insulated from any potential payroll tax hike, meanwhile, are retiree hotspots in the Sun Belt and high-poverty or aging metropolitan areas mainly in the Rust Belt and California’s Central Valley. These metros, in red on the map, depend least on workers’ earnings as a source of income (although working stiffs still earn the majority of income in every metro area except Cape Coral and North Port, FL). Instead, income in these places is relatively more dependent on either investments or transfers, or both. Many—but not all—of these metros have struggled through recession and recovery.
Certainly, economic performance over recession and recovery explains some of the variation in earnings’ share of total income across metropolitan areas. After all, automatic stabilizers in the form of government transfers kick in, by design, during recessions to support lost earnings. Underlying any cyclical noise, however, are real differences in the nature of economic activity in and across metropolitan area economies. Certain metros, structurally, subsist more on the earnings of working stiffs than others. These places have the most at stake in the current payroll tax cut debate.