How much is that Benjamin in your pocket really worth? If you live in New York or California, it may be a lot less than you think in relative value terms. But no surprise, your money is worth least in Washington D.C., where the relative value of $100 is a mere $84.67. Meanwhile, in Arkansas and Mississippi, your $100 gets stretched thanks to the low cost of living to $114.29 and $115.34 respectively. These numbers from The Tax Foundation are based BEA data. Alan Cole explains it here.
Regional price differences are strikingly large; real purchasing power is 36 percent greater in Mississippi than it is in the District of Columbia. In other words, by this measure, if you have $50,000 in after-tax income in Mississippi, you would have to have after-tax earnings of $68,000 in the District of Columbia just to afford the same overall standard of living.
It’s generally the case that states with higher nominal incomes also have higher price levels. This is because there is a relationship between the two: in places with higher incomes, the prices of finite resources like land get bid up. (This is especially true in cities.) But the causation also runs in the opposite direction. Places with high costs of living pay higher salaries for the same jobs. This is what labor economists call a compensating differential; the higher pay is offered in order to make up for the low purchasing power.
This relationship is important, though it is not the only thing that matters. Some states, like North Dakota, have high incomes without high prices. Adjusting incomes for price level can substantially change our perceptions of which states are truly poor or rich.
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