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QUESTION: When running the Geographic Assessor, all of the destination city costs are based on the base city earnings. If you were to apply a COLA, how would you take into account the higher cost of living (including the effective tax for the higher earnings) in the new area?
In the process of determining costs in the destination area, ERI calculates an answer to the question: "What does it cost to buy the base city lifestyle in the destination city, assuming that all things (including the spending pattern which is based on the Base City earnings level) are the same?" ERI does not factor for a salary increase. This is due to the fact that ERI customers award COLAs in different ways, including company provided housing, the provision of services, company car, different tax equalization policies, etc. In addition, COLAs are often not built into salaries. (See Tax Equalization.)
If the real-life situation will involve a pay increase, then you should consider the effect of greater "spending" on income taxes.
See Two City Comparison - Background for more information.