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August 5, 2016

The Real Value of $100 in Each State

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From Tax Foundation

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The states where $100 is worth the most are Mississippi ($115.34), Arkansas ($114.29), Alabama ($113.90), South Dakota ($113.64), and West Virginia ($112.49). 

In contrast, $100 is effectively worth the least in the District of Columbia ($84.67), Hawaii ($85.62), New York ($86.43), New Jersey ($87.34), and California ($88.97).

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.

For example, Nebraskans and Californians earn approximately the same amount in dollars per capita, but after adjusting for regional price parity, Nebraskan incomes can buy more.

 

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August 5, 2016 at 12:01 PM | Permalink | Comments (2)

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