| July 1, 2011
Low Cost of Living Boosts Oklahoma’s Economic Competitiveness
One of the most important economic considerations people look at when deciding where to relocate is the cost of living in an area. Oklahoma’s low cost of living, relative to the national average, gives the state an advantage over higher-cost areas. In fact, as we pointed out in these pages last year, Oklahoma’s lower cost of living vis-à-vis California is a major reason behind the “reverse Dust Bowl” wherein we’re seeing more people coming from than leaving for California.
Measuring Cost of Living
The most definitive and longest-running cost-of-living estimates are calculated by a nonprofit organization called the Council for Community and Economic Research (C2ER) and are published under the name ACCRA Cost of Living Index.1 Its inaugural publication in 1968 was designed to help large employers decide how to compensate different employees who may do the same work but live in very different locations. After all, $50,000 is a good salary in Oklahoma but you would be living under a bridge in New York City.
Table 1 shows the ACCRA Cost of Living Index for all 11 participating cities in Oklahoma, using the average between the first quarter of 2010 and the first quarter of 2011—an index value of 100 indicates the national average. All the participating cities have a cost of living that is lower than the national average, ranging from a low of 85.4 in Pryor to 95.2 in Lawton.
Additionally, the index is made up of six subcategories which have their own weight in terms of their influence on the overall cost-of-living index: grocery items (13.3 percent), housing (29.3 percent), utilities (10.2 percent), transportation (9.9 percent), health care (4.2 percent), and miscellaneous goods and services (33.1 percent). Overall, housing is the driving force behind Oklahoma’s low cost of living, with an average index score of 79.3. The lowest housing index score belongs to Tulsa at 67.1 while the highest belongs to Lawton at 90.8.
Table 2 shows some of the prices of selected items used to create the cost-of-living index scores. In order to obtain these prices, the comparability of goods and services across different cities has to be identical. For instance, the homes are based on new construction of a 2,400-square-feet home on an 8,000-square-feet lot. The national-average price for such a home is $287,807, but in Oklahoma such a home can be acquired for much less—as low as an average of $191,555 in Tulsa, for example.
Interestingly, even widely available commodity items, such as T-bone steak, can have significant fluctuations in price. In Oklahoma the lowest price for T-bone steak is in Tulsa ($7.60 per pound) but can be as high as $9.26 in Norman—a difference of 22 percent. The national-average price for T-bone steak was $9.01.
Why Does This Matter for Public Policy?
As a result of cost-of-living differences, two people living in two different areas, but earning the same income, will not have the same standard of living. Table 3 shows how Oklahomans can purchase $50,000 worth of goods and services (at the national average) at a much lower income level. In Pryor, for instance, a person would need only $42,700 to buy the equivalent amount of goods and services.
As a result of these cost-of-living differentials, any public policy initiative that uses fixed dollar amounts will create winners and losers based on where one lives. For example, let’s look at Oklahoma’s individual income tax system, which uses numerous fixed dollar amounts such as the standard deduction, personal exemptions, and marginal tax rate brackets.
Table 3 also shows how the cost-of-living-adjusted income, discussed previously, results in very different income tax bills (calculations are based on a married couple with two children). Since Pryor has the lowest cost of living, they get the largest tax bonus with a tax bill that is $402 lower than if they were at the national average. Lawton, on the other hand, has a tax bonus of only $132 due to the higher cost of living vis-à-vis Pryor.
Additionally, Lawton’s income tax burden, as a percent of income, is higher than Pryor’s (3.2 percent versus 3 percent). This is due to the “progressive” nature of Oklahoma’s income tax, where marginal tax rates increase with higher income levels.2 However, since the income tax does not factor in cost-of-living differences, Lawton’s higher level of income is illusory since $47,600 buys the same level of goods and services as $42,700 will buy in Pryor. Yet the taxpayers in Lawton will pay more of their income in taxes simply because of a higher cost of living.
This is not only economically distorting, it is also unfair. The simplest way to correct this bias in the income tax code is to treat all taxpayers the same by eliminating all marginal tax rates (and tax brackets) in favor of a single rate. Other features of the income tax code that use fixed dollar amounts, such as the standard deduction or personal exemption, should be put on a sliding scale. For instance, the $1,000 personal exemption could instead be based on some equivalent percentage of income—say, for example, one percent of income.
Oklahoma’s low cost of living is a boon for economic competitiveness. Unfortunately, there is still a lagging awareness of cost-of-living differences and how they affect public policy. The individual income tax is a clear example of how cost-of-living differences create winners and losers based on where one lives. Gov. Mary Fallin says her long-term goal is to eliminate the state income tax. But until that happens, moving to a single, flat income tax rate would be the simplest and quickest way to end the cost-of-living bias in the income tax.
Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.
1. The U.S. Department of Commerce’s Bureau of Economic Analysis has been trying to develop its own cost-of-living index, but it is still in an experimental stage. Their preliminary findings also show that Oklahoma has a lower than average cost of living. For more information, see Aten, Bettina H., Figueroa, Eric B., and Martin, Troy M., “Research Spotlight: Regional Price Parities by Expenditure Class, 2005-2009,” Survey of Current Business, May 2011, pp. 73-87, http://www.bea.gov/scb/pdf/2011/05%20May/0511_price_parities.pdf.