People in low-income neighborhoods face higher costs for everyday needs.
This extra burden is known as the “ghetto tax” or “poverty tax.” It’s the practice of charging poor more than wealthy people for the same products or services.
The Ghetto Tax Isn’t a New Concept
The “cost of being poor” is a long-standing issue that burdens those who can least afford it.
A study from the Public Policy Institute of California shows that groceries can cost up to 10% more in these areas. So if a family usually spends $200 a week on food, they’re shelling out an extra $20 because of this “ghetto tax.” That’s like throwing away over a thousand dollars a year!
And it’s not just about the cost; it’s also about what you can buy. The University of Washington found that healthier foods cost 18% more in less wealthy neighborhoods. This means families often have to choose less healthy options, even though they’re already paying more.
More studies back this up. Research from Lehigh University showed groceries were about 9% more expensive in poor areas of Philadelphia. And it’s not just a Philly thing; New York City has seen up to a 20% price difference for basic stuff like milk and bread.
The University of Illinois at Chicago found that even if two stores are part of the same chain, the one in a low-income area might charge 5% to 10% more for the exact same items.
It might seem like a quick fix when you need cash fast, but it ends up costing you a lot more in the long run. This is a big part of what some people call the “cost of being poor.”
Let’s look at some numbers. Research from Pew Charitable Trusts says that 12 million Americans take out payday loans every year. These folks end up paying an average of $520 in extra fees to borrow just $375. That’s like borrowing a dollar and having to pay back a dollar and a half, again and again.
The Consumer Financial Protection Bureau adds to this by saying that most people can’t pay back their payday loans on time. So they have to take out another loan to cover the first one, and the cycle just keeps going. It’s like falling into a hole and then digging yourself deeper as you try to get out.
Higher insurance Premiums
A study by ProPublica and Consumer Reports found that people who live in mostly minority neighborhoods could pay as much as 30% more for car insurance, even if they have the same driving record as someone in a wealthier area. Imagine two people—let’s call them Alex and Jamie.
They both have the same kind of car, they’re the same age, and they’ve never gotten a ticket. But Alex lives in a richer neighborhood, and Jamie lives in a poorer one. Jamie could end up paying $300 more per year just because of where he lives.
Another study by the National Association of Insurance Commissioners found that renters often pay more for the same insurance coverage than homeowners. So if you’re renting a place because you can’t afford to buy a home, you might end up paying more for insurance on top of that.
In both examples, people end up paying more just because they have less money to begin with. It’s like a snowball effect—once you start falling behind, it gets harder and harder to catch up.
Poor Public Transport
Inadequate public transportation disproportionately impacts low-income communities, adding to what is often termed the “cost of being poor.” Unreliable or infrequent bus and train services can result in additional expenses for alternative transportation methods such as taxis or ride-share services. These alternatives are typically more costly than a standard bus fare.
A Harvard Business School study found that people from wealthier areas are more likely to get called back for job interviews than those from poorer neighborhoods, even when their resumes are almost identical. In simple terms, just your address can keep you from getting a job opportunity.
Deposit and Utility Hurdles
A study by the Urban Institute found that about one-third of American households face challenges in paying for basic utilities like electricity and water. If you’re from a low-income household, you’re more likely to face higher deposits for utilities, and sometimes, these deposits can be equal to two months’ worth of bills. That’s a big chunk of money to come up with all at once.
A report by the National Low Income Housing Coalition highlights how steep initial deposits for renting a home can act as a barrier for low-income families. Often, these deposits can equal a month or even two months’ rent, not to mention additional fees for background and credit checks.
So, let’s say you’re moving into a new place. If the rent is $800 a month and you have to pay a deposit equal to two months of rent, plus $50 for a background check, that’s $1,650 before you even move in. And if you also have to pay a utility deposit, that’s even more money upfront.
David Bakke is a personal finance expert and the published author of the book ‘Don’t Be A Mule.’ Specializing in money management, investing, retirement, income generation, and entrepreneurship, he earned his Bachelor of Arts in Creative Writing from the University of South Florida. David started his own blog, YourFinances101, in 2009. His writing has been featured in Investopedia, Business Insider, US News, and Money Crashers.