How We're Improving Tax Calculations in Partnership With PolicyEngine

To ensure our data better reflects on-the-ground economic realities, the Living Wage Institute has partnered with PolicyEngine to enhance how we calculate household tax obligations. This partnership represents our continued commitment to delivering accurate, actionable data for the employers, workers, and communities who depend on it. 

Unlike rent or a grocery bill, taxes aren't always a visible line item in a family's budget—but they represent the gap between what families need to spend and what they must earn. For families and individuals, this gap can make or break affordability in their community. For employers, this gap shapes how they structure compensation—balancing higher wages with employer-paid benefits like health insurance. 

Transitioning from NBER TAXSIM to PolicyEngine

Getting these tax calculations right requires sophisticated tax modeling. We’ve historically used the National Bureau of Economic Research’s (NBER) TAXSIM microsimulation model to estimate U.S. federal and state tax liabilities for our living wage calculations. Over the last year, PolicyEngine—a nonprofit organization that creates free, open source software to model tax and benefit policies—worked with the NBER team to steward TAXSIM’s storied legacy. 

As part of this transition, the Living Wage Institute partnered with PolicyEngine as an early adopter of their open source TAXSIM emulator. This emulator, powered by PolicyEngine’s microsimulation engine, is the foundation for our 2026 tax estimates.

Iterating to find incomes before taxes

The Living Wage Institute’s partnership with PolicyEngine also enabled us to redesign how we model taxes. Previously, we approximated taxes based on a family’s basic needs budget—meaning their income after taxes—rather than the exact income required for both basic needs and taxes.

We built an iterative process to solve this. PolicyEngine’s open-source framework gave us the flexibility to progressively refine income estimates. We start by assuming that taxes represent roughly 22% of gross income, and adjust iteratively until after-tax income matches the cost of a household’s annual basic needs. This iterative approach means our 2026 living wage figures now represent the precise pre-tax income households need, not an approximation.

Capturing local tax realities

PolicyEngine’s framework also improves our geographic coverage. Their model accounts for income-dependent credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which can significantly reduce tax burdens for working families and individuals. Looking ahead, PolicyEngine's capability to model local tax programs in major metros like Chicago, Los Angeles, and New York City will enable even greater precision in future releases.

The result of this effort is our most methodologically rigorous living wage data yet. With affordability at the center of national and local conversations—and the living wage emerging as a critical input for compensation decisions—the Living Wage Institute is committed to ensuring our data reflects economic reality as accurately as possible.

Interested in learning more about our data? Reach out here.