It is no secret that it is expensive to live in Manhattan, but just how out of whack is the cost of living compared to the rest of the country? Fortunately we can turn to the ACCRA Cost of Living Index for answers.

Published every quarter since 1968, the index is the country’s longest running and most respected cost of living comparison. It is used widely by both the private and public sector. During the fourth quarter of 2006, Manhattan’s cost of living was 114.7% higher than the national average and tops the list of the 194 major American cities represented.

Anyone who has recently tried to buy a row house or condo in Manhattan will not be surprised to learn that housing is the culprit behind the extremely high cost of living. In fact, housing costs of the city were 294% above the national average.

To better understand what this means, the index compares the cost of housing between cities based on several criteria for homes: built on an 8,000-square-foot lot (waived in Manhattan), contains 2,400 square feet of living space, has four bedrooms, and has two bathrooms. Such a home in Indianapolis, Ind., which was near the national average, would cost $302,433. In Manhattan, the cost soars by 296% to $1,197,500.

With the cost of living high above the national average, this begs the question: “Why is Manhattan such an expensive place to live?” Naturally, there are many obvious answers such as population density, climate, and geography. However, less obvious are the legislative choices made by policymakers in Albany and City Hall, especially in regard to taxation.

Intuitively, it is easy to see how taxation affects cost of living because taxes are a big part of our everyday purchases. For example, we pay gasoline excise taxes every time we fill up our car. If you look closely at the pump, you will see a sticker that details the federal, state, and the occasional local excise taxes that you are paying. However, these taxes don’t show up on your sales receipt because they are already included in the price, along with many other taxes.

As with housing, Manhattan also tops the cost of living list in transportation costs. In Albuquerque, N.M., which was near the national average in cost of transportation, a gallon of gasoline cost $2.20. In Manhattan, it was 12% higher at $2.46 a gallon.

According to the American Petroleum Institute, New York has the highest gasoline taxes in the country at 60.8 cents per gallon — as compared to New Mexico’s 36.4 cents per gallon — the 43rd highest city for gas tax. Lower gasoline taxes would mean lower gasoline prices. If the state gasoline excise tax of 24.6 cents per gallon were eliminated, it would be possible for gasoline prices in Manhattan to fall as low as $2.21 a gallon, just above the national average.

Yet another feature of the tax code that drives up the cost of living is the application of the general sales tax to business inputs. For example, New York does not exempt business office furniture from the sales tax. This increases the cost of doing business. As costs rise, so do prices. Economists call this hidden tax “sales tax pyramiding.”

Pyramiding is no small problem considering that the combined state and local sales tax rate in Manhattan is one of the highest in the country at 8.375%. According to the national Council on State Taxation, New York businesses paid $11.3 billion in sales taxes on business inputs. Only businesses in California and Texas bear a larger pyramiding burden.

Analogous to pyramiding is the multiple taxation of income that results from the layering of different taxes, one on top of the other. The infamous unincorporated business tax, enacted in 1966, is a classic example of the double taxation of income. The 4% tax is levied on income from partnerships, estates, trusts, and limited liability companies. The end result is that small business owners pay taxes twice on their income — once at the business level and also at the individual level. Again, as costs rise, so do prices.

One way or another, Manhattan’s high tax burden filters its way into higher prices for the goods and services bought every day. To test this idea more comprehensively, I compared the cost of living relative to the tax burden for the largest city in every state. The comparison found that a high tax burden goes hand-in-hand with a high cost of living.

With such dire economic consequences, why not simply eliminate these hidden taxes? Unfortunately, politicians like hidden taxes since they can convince voters that they are getting a free lunch; and businesses fear of losing one of their biggest customers, i.e., government, if they expose the truth that there is no such thing as a free lunch. Instead, businesses do their best to quietly pass on the tax cost in the form of higher prices that includes the higher cost of living.

Mr. Moody is president of Economic Analysts, Inc., a public policy consulting group, and has more than 10 years of tax policy experience at the federal, state, and local levels.