Cost of living is calculated by taking into account expenses like costs of healthcare, food, transportation, shelter, childcare, energy and clothing. The average cost of living in California is $53082 per year, 51% higher than the national average of the United States.
The Golden State’s high cost of living is making it hard for residents to survive, leading some to leave the state; 144,472 people left California in 2022-2023. Here is a list of thirteen reasons behind California’s high cost of living.
Housing Shortage
One of the major reasons for the high cost of living in California is the housing shortage. The state needs to build 3.5 million homes to meet the demand exacerbated by high population and migration. The construction costs are extremely high in the state, $200-$400 per square foot. The cost of materials required for construction is increasing at an alarming rate of 14% per year.
Taxes
California is known for its notoriously high taxes; everything from income to sales tax is high. As of 2024, the state’s income tax rates range from 1.1%-14.4% and apply to everyone since California removed the wage ceiling. California has one of the highest sales taxes in the U.S., an average of 8.851%. The Golden State also taxes retirement, and the residents pay one of the highest median property taxes, $4500.
High Utility Costs
High utility costs further increase the cost of living in California; on average, Californians spend $437.92 monthly on utilities, 11% more than the rest of the U.S.
Everything from electricity to energy to gas to the internet costs more than the national average. Most money is spent on energy ($123) and phone ($114).
Food
High food prices significantly contribute to California’s already elevated cost of living; grocery prices in California have surged by 27% over the past four years. Groceries cost $298 per week in California, more than any other state in the U.S. Families with children have to spend an average of $331 per week on groceries alone.
Other food items have also become expensive; the cost of dairy products increased by 21%, and the cost of fruits and vegetables increased by 22%.
Income inequality
California has higher levels of income inequality than any other state. Families in the top income distribution earn ten times more than those at the bottom. This wealth gap reflects a 59% income growth for the wealthiest compared to just 13% for the lowest earners over the past four decades. As wealth concentrates among the top earners, demand for luxury housing and upscale amenities increases, pushing prices beyond the reach of lower-income households.
Tourism
Tourism is one of the major reasons for the high cost of living in California. In 2023, tourists spent $150 billion visiting the Golden State.
When visitors flock to an area, businesses can charge premium prices for accommodations, meals, attractions, and other offerings. This allows them to capitalize on the influx of tourist dollars and drives up local prices.
High Healthcare costs
Healthcare in California is 8% higher than the national average. The total annual healthcare spending in California has reached $405 billion or $10,299 per person, while the rest of the U.S. spends $10,191. Private Health insurance costs $5302 per person in California and $4994 in the rest of the country. Even Medicare ($13564) and Medi-cal ($7929) cost more in the Golden State.
Apart from this, California also taxes the Health Savings accounts (HSAs).
High Childcare costs
California is one of the least affordable states when it comes to childcare. The state is ranked third most expensive for infant care; the average cost is $16,945 annually. Surprisingly, the cost of infant care in the Golden State is higher than the tuition fee of a public college. Childcare takes up 24.9% of a median family’s income, but for minimum-wage workers, it takes up 62.7% of their income.
Salaries
Due to the presence of numerous Fortune 500 companies and other booming industries, salaries in California are much higher than in the rest of the U.S.
The average salary in California is $111622, as opposed to the national average of $63795. The federal minimum wage is $7.25, but the minimum wage in California is $16, the highest in the U.S. This has also led to an increase in prices that have further increased the cost of living.
Housing Affordability
The median price of a home in California is $857,800, with a 7.7% year-on-year increase, and the median rent in California is $2850; both are 33% higher than the national average.
The high cost of housing makes buying a home or renting an unattainable dream for many young Californians, contributing to the state’s high cost of living.
Natural Disasters
Between 1980 and 2024, California suffered 46 natural disasters that caused losses exceeding $ 1 billion. The state is prone to wildfires and floods; these natural disasters significantly contribute to the state’s high cost of living by increasing housing costs, driving up insurance rates, and adding to the costs of rebuilding damaged homes and infrastructure. They disrupt local economies, leading to job losses, reduced incomes, and strain on public resources.
Migration
California is home to Silicon Valley and Hollywood; everyone wants to live in the Golden State. This means there is a lot of migration into the state, but the state doesn’t have enough resources for everyone. More people means more demand and more excess demand increases the prices. This is one of the major reasons for California’s high cost of living.
Water Prices
Water prices in California are much higher than in the rest of the U.S. The water bill for an average household in California is $65.85, while for other states, it’s $44.77. Outdated infrastructure, climate change, and population are the main reasons for high water prices in the Golden State. High water prices, in turn, increase the cost of living in California.