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Cost of Living Differentials Guide

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Income One of the driving factors behind a cost-of-living calculation is income. Does either the origin or destination have a state income tax? If so, is it a flat tax or is it progressive? What deductions, credits or phase-outs does each state have? California has a progressive state income tax with higher rates for higher incomes. Thus, an individual moving from a state without income tax (such as Texas), will pay an increasingly higher amount. That's not just in terms of dollars, but as a percentage of their income; specific income levels are a key component of the cost-of-living equation. Consumables Consumables must also be factored in appropriately based on income and family size. For example, there is only so much milk or bread that an individual or family can consume in a year. Most individuals don't realize that, at lower to middle incomes, the average amount spent on a daily/monthly/annual basis at the grocery store, drug store, home improvement store, etc. will often amount to more than they spend on housing. While spending patterns will vary by income, with lower incomes spending a higher percentage on food at home (grocery stores), and higher incomes spending more at restaurants and on leisure/recreational activities, there is only so much that will be spent in a year on consumables. For example, increased costs for a gallon of milk, a gallon of gas, or a pound of chicken over the course of a year impacts someone who makes $30,000 much more than it does someone who makes $300,000 or $3,000,000. The end- result is that lower incomes will be disproportionately impacted by higher prices. Housing Housing is a key component in determining a differential between two locations. While rents will go up in higher cost destinations, the increased cost for monthly principal and interest in buying a home, as a percent of income, will almost always be much higher than it is for renters. This means that renter cost-of-living calculations will be less than homeowner calculations at similar incomes. Further, entry level home market prices (smaller homes) in higher cost locations will typically be much higher proportionately than larger homes in these same markets. In other words, the "entry" cost to buy any home is much higher and impacts lower incomes more significantly. Other parts of total housing costs include insurance, property taxes and maintenance. Renters don't have maintenance costs. Renters insurance is nominal and doesn't vary much between locations in the U.S. as it only covers contents. On the other hand, homeowners insurance is much more expensive, covering the dwelling and contents, and can vary significantly across the country or even within a particular state. Residents of coastal Florida, for example, are required to have additional wind policies for hurricanes to cover their homes. This isn't required of renters. Property taxes can be a significant expense in certain locations across the country that renters don't pay. Thus, moving to a location with higher property taxes will impact a homeowner but not a renter. © 2021 MOTUS, LLC COST-OF-LIVING DIFFERENTIALS: NOT A SIMPLE CALCULATION 2

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