What does the LIST function do in a formula

Hi all,

I have an =INDEX formula I've been wrestling with that gives me an error when I drag it down. This is referencing the thread I made last week regarding filling in two columns with reference data automatically.
The thread can be found here:

The specific part of the formula that's giving me trouble is in the "LIST!" function below. I illustrated how it doesn't work in the Attached spreadsheet titled "Maine Median Household Income by Place". Drag down formula in both columns to see how one works and the other doesn't, then go over to the "California Median Household Income" book to see my reference for the formula. Why doesn't the LIST function work for me? I can do it the other way, but I feel like I'm missing something here.

Below is a sample of the formula for clarity's sake:

What works for me:

Formula:

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and

What Newdoverman did that I tried to replicate:

Formula:

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Here are both spreadsheets, the one labeled 'Excelhelpsample' is the basis of my formula.

California Median Income by City Excelhelp Sample.xlsxMaine Median Household Income by Place.xls