Nominal Income and Real Income Vary By State
July 14, 2015
The Bureau of Economic Analysis has been tracking price parities between states and comparing it to the national average since 2013. They have found that the price of goods varies greatly, affecting the real income of states. In this article, the Tax Foundation uses a $100 denomination to gauge the differences between states.
Prices for the same goods are often much cheaper in states like Missouri or Ohio than they are in states like New York or California. As a result, the same amount of cash can buy you comparatively more in a low-price state than in a high-price state.
Generally, higher nominal incomes have higher price levels. There is a relationship between the two: in places with higher incomes, the prices of finite resources like land get bid up. But the causation also runs in the opposite direction. Places with high costs of living pay higher salaries for the same jobs. Labor Economists call this a compensating differential; the higher pay is offered in order to make up for the low purchasing power.
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.
Top Three States Where $100 Are Worth the Most:
- Mississippi ($115.21)
- Arkansas ($114.29)
- South Dakota ($114.16)
Top Three States Where $100 Are Worth the Least:
- District of Columbia ($84.96)
- Hawaii ($86.06)
- New York ($86.73)
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. This has some unexpected consequences; people in high-price-level states like New Jersey will often pay more in federal taxes without feeling particularly rich.
Source: Alan Cole and Scott Drenkard, "The Real Value of $100 in Each State," Tax Foundation, July 8, 2015.
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