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Earlier this week, The Tax Foundation published the map above that accompanies the article “The Real Value of $100 in Each State.” The data in the map are based on Regional Price Parities (RPPs), which measure the differences in the price levels of consumer goods and services across all US states (and DC) according to BEA data released on July 1 for the year 2013. RPPs are expressed as a percentage of the overall national price level in 2013, which is equal to 100.
In 2013, the District of Columbia’s RPP (117.7) was higher than that of any state, largely because DC housing costs are 57% above the national average and second only to Hawaii, where rents are 58.7% above the national average. Based on DC’s RPP of 117.7, that would mean that the real value (purchasing power) of $100 in DC is only $84.96 ($100 / 1.177), see map above. The four states with the highest RPPs and where the value of $100 is the lowest are Hawaii ($86.06), New York ($86.73), New Jersey ($87.34) and California ($89.05), and all of those states have housing costs that are more than one-third above the national average. The five states with the lowest RPPs and where the value of $100 is the highest are Mississippi ($115.21), Arkansas ($114.29), South Dakota ($114.16), Alabama ($114.03), and West Virginia ($113.12). Again, it’s mostly because of low housing costs that contribute to low RPPs and higher relative values for $100 – the five states with the lowest RPPs all have housing costs that are more than one-third below the national average.
The Tax Foundation makes a couple of key points:
1. 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. 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.
2. Many policies – like minimum wage, public benefits, and tax brackets – are denominated in dollars. But with different price levels in each state, the amounts aren’t equivalent in purchasing power [see related discussion below].
The significant differences in cost-of-living by state illustrated in the map above made me ponder the following question: How does per-capita personal income vary by state, once we adjust for regional differences in both: a) personal taxes, and b) prices? The table below displays data that attempt to answer that question by comparing: a) per-capita, pre-tax personal income for each US state in 2013 and b) disposable (after tax) per-capita income for each state adjusted for prices/cost-of-living, with comments provided below the table.
|Rank||State||Per-capita Personal Income||State Price Index||New Rank||State||Per-capita Income, Adjusted for Taxes, Prices||Change in Rank|
|4||New Jersey||$55,386||114.5||4||South Dakota||$44,750||+16|
|16||Rhode Island||$46,989||98.1||16||New Jersey||$39,098||-12|
|49||S. Carolina||$35,831||90.5||49||New Mexico||$32,204||-1|
Comments: The first group of four columns in the table above shows state rankings for per-capita pre-tax personal income in 2013, along with each state’s price parity index for that year. The second group of four columns displays the state rankings for per-capita disposable (after-tax) income in 2013, adjusted for each state’s relative cost-of-living. The last column displays the change in each state’s ranking after adjusting for personal taxes and cost-of-living. Here are some of the findings:
1. Both North Dakota and Wyoming moved up five places in the state rankings, from No. 7 and No. 8 before adjusting for taxes and cost-of-living, to No. 2 and No. 3 after adjusting for both factors. Even though personal taxes paid as a share of pre-tax, per-capita personal income are higher in North Dakota (12.71%) and Wyoming (12.87%) than the US average of 10.95% in 2013, the lower-than-average cost-of-living in those two states moved them up five places to rank as the country’s two highest-income states (not counting DC).
Similarly, South Dakota moved up 16 places in the rankings from No. 20 to No. 4 due to a combination of being a low cost-of-living state (12.4% below the national average) and the state with the third lowest personal tax rate (8.63% of pre-tax, per-capita personal income). Iowa and Kansas moved up 16 places in the state rankings after adjusting per-capita personal income for taxes and living costs (from No. 24 and No. 25 to No. 8 and 9), due to a combination of a below-average tax burden for both states, and a cost-of-living in each state almost 10% below the national average.
2. As expected, the states that moved down the most in the rankings were high-tax, high cost-of-living states like California (fourth highest tax burden, fifth highest cost-of-living), which moved down 25 places from No. 12 to No. 37, New York (second highest tax burden, third highest cost-of-living), which moved down 24 places from No. 5 to No. 29, and New Jersey (fifth highest tax burden, fourth highest cost-of-living), which moved down 12 places from No. 4 to No. 16.
Bottom Line: Personal taxes and cost-of-living differences vary widely among US states. To emphasize and expand on a point made by The Tax Foundation, adjusting state per-capita personal incomes for both differences in taxes and price levels can substantially change our perceptions of which states are poor or rich. And those perceptions change the most for high tax, high cost-of-living states like California, which goes from being in the top 25% of America’s states by pre-tax, per-capita personal income, to being in the bottom 25% of US states (and below Alabama and Arkansas) after adjusting for the state’s high tax burden and high cost-of-living. Likewise, New York drops from being America’s fifth highest-income state before adjusting for taxes and cost-of-living to being in the bottom half of states (and below Texas, Louisiana and Tennessee) on an after-tax, cost-of-living adjusted basis. On the other hand, a state like South Dakota that appears average based on pre-tax, per-capita personal income rises to become America’s fourth highest-income state after adjusting for taxes and cost-of-living.
Finally, in regard to the significant differences in regional costs-of-living discussed above, it’s an important factor that policymakers frequently overlook when proposing legislation like a uniform, once-size-fits-
all–none $10.10 per hour national minimum wage. In fact, regional differences in purchasing power make a national minimum wage unworkable for low-wage, low-cost communities, as my AEI colleague Andrew Biggs and I argued last year in our article “A National Minimum Wage Is a Bad Fit for Low-Cost Communities.” Here’s our conclusion:
Even proponents of the minimum wage would have to concede that a universally applied minimum wage, without any adjustments for the significant differences in the cost of living across the country, has to have disproportionate effects by location. And proponents have to also agree that a minimum wage of $10.10 per hour will be far too high for low-cost rural areas, and will have adverse effects on low-skilled workers in those communities, even if low-skilled workers in high-cost, high-wage communities are relatively unaffected.
Before raising the minimum wage to $10.10 per hour, we should carefully consider the long-lasting damage that will be inflicted on thousands of America’s low-wage, low-cost communities from that “one-size-fits-all” national minimum wage.
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