This year for the first time, the Bureau of Economic Analysis released cost of living data for each state. Data on personal income and average taxes paid, meanwhile, has been available for a long time. Everyone knows these three metrics vary greatly by state. But what happens when you combine the three?
When you take into account the large differences in cost of living, disposable income varies nowhere near as much as you might think at first glance. Read on for more.
Average disposable income by state
The Bureau of Economic Analysis defines "disposable personal income" as total personal income minus personal current taxes. Basically, it's the amount of income people have left over after paying taxes. You can see per-capita disposable income by state below. Note that the data is from 2012, because that is the most recent data that the Bureau of Economic Analysis provides for regional price parity.
Though it's not a state, D.C. ranks No. 1 by per-capita disposable income at $65,770. The state with the highest per-capita disposable income is Connecticut, at $50,534, followed by North Dakota, at $49,273. Massachusetts ($48,160), New Jersey ($48,108), and Maryland ($47,222) round out the top five. This only tells one side of the story -- the income side.
On the cost side, cost of living varies greatly by state with the Northeast, as well as both coasts, generally having a higher cost of living. I've shown before that most of the difference is due to the cost of housing, as people want to live on the coasts and near other people. If you take into consideration the different costs of living, some states move higher when ranked by disposable incomes, while others drop. The moves can be significant.
The "real" value of average disposable income
If you account for the differences in cost of living, you get a much different picture from the one above. Again, the data is current as of 2012.
While D.C. still has the highest per-capita disposable income, it also has the highest cost of living, so its real per-capita disposable income is $55,643. That's a $10,000 drop from its nominal per-capita disposable income!
On the flip side, you have North Dakota. While the state had a nominal per capita income of $49,273, its real per-capita disposable income was the highest of all states, at $54,506. That's a $5,233 jump from its nominal per-capita income. Basically, its cost of living is so low that dollars go much further in the state compared to the national average.
Following North Dakota are Wyoming and South Dakota, both with real per-capita disposable incomes of roughly $47,500. South Dakota sees the largest income boost of any state, with a $5,616 difference between its nominal and real per-capita disposable incomes. Connecticut, which is No. 1 in nominal terms, drops to No. 4 on a cost-of-living-adjusted basis, down $4,342 to $46,192. Rounding out the top five is Nebraska, at $45,243, with a jump of $4,479 between its nominal and real per-capita disposable incomes.
Of the original top five, the biggest drop came from New Jersey, which fell from No. 4 in nominal per-capita disposable income to No. 11 in real per-capita disposable income, at $42,163. The $5,945 drop was matched only by New York and Hawaii, which each dropped comparable amounts. While Hawaii is one of the happiest states in the U.S., it is in the bottom five as ranked by real per-capita disposable income.
Overall, differences in per-capita disposable income between the top-earning and lowest-earning states shrank nearly 27% when adjusted for cost of living. That's an important thing to keep in mind if you're still working. While a salary in a different state may be higher than your current salary, the cost of living can translate to dramatic differences in how far that salary goes, as well as your overall well-being. If you're living on a fixed income, the cost of living by state is important to consider, as well as the taxes -- or lack thereof -- that you'll face if you move.
Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, life, and success. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.