While the price of many goods and services varies across the country, much of the differences in cost of living between states are the result of differences in housing costs. For example, with such high rental and housing prices in Hawaii, a dollar retains only 63 cents of its average value when spent on rent in the state. A dollar spent on rent in Arkansas on the other hand is essentially worth $1.60.
States with large shares of residents living in expensive housing in urban areas account for the vast majority of states where a dollar is worth the least. A dollar tends to be worth much more in states, particularly in the South, where a much smaller share of residents lives in cities.
Businesses that sell consumer goods in dense urban areas often have to pay a higher rent than businesses in rural areas. Some of the extra expense in the urban areas is passed on to customers by charging higher prices.
In states where a dollar is worth less — that is, states with the highest cost of living — residents tend to have higher incomes. While New York state residents only see $0.86 of value from each dollar spent, the annual per capita income is also $10,000 higher, more than enough to offset the lower purchasing power.
Incomes vary more between states than the value of a dollar. For this reason, in most of the states with high incomes and higher prices, residents are still able to afford more than residents of states with lower incomes and cheaper prices.
While the states with the highest incomes tend to be relatively expensive places to live, this is not always the case. There are six states where the per capita income is higher than average, and the cost of living is less than the average nationwide. Notably, when per capita personal income is adjusted to the cost of living, North Dakota is the state with the highest per capita personal income.