It’s April 15, tax filing deadline day. With the certainty that the sun will rise, right wing tax and public policy voices will bemoan doing their part to help pay for public goods like roads, schools, and police.
They’ll point to something called “tax freedom day,” which supposedly represents the day on which taxpayers will have earned enough money to pay all of their federal, state, and local taxes. According to the Tax Foundation, the 2008 “tax freedom day” in will Minnesota fall on April 27-the 8th latest among the fifty states. But guess what? Despite our late “tax freedom day,” Minnesota has the 14th highest after tax-income in the nation. In general, states with late tax freedom days tend to have higher after-tax income than states with early tax freedom days.
While the Tax Freedom Day report has been criticized by the Center on Budget and Policy Priorities, for the purposes of this analysis it will be assumed that the tax freedom day data and methodology are reliable.
Using data from the Tax Foundation, it is possible to calculate “after-tax income” per capita by subtracting tax burden per capita from income per capita. This table (PDF at end of article) shows the “tax freedom day” rank (with “1” being the earliest tax freedom day and “50” being the latest tax freedom day), total tax burden per capita, income per capita, after-tax income per capita, and after tax-income ranking (with “1” being the highest per capita after-tax income and “50” being the lowest). Information in this table is based on data used for the 2008 tax freedom day calculations. States are listed alphabetically and in order of after-tax income per capita from highest to lowest.
In 2008, Connecticut has the latest tax freedom day in the nation (May 8). However, before shedding tears for inhabitants of the Nutmeg State, note that Connecticut has the highest per capita after-tax income in the nation based on data used by the Tax Foundation to make the tax freedom day calculations. Mississippi has the lowest per capita after-tax income in the nation, but-ironically-the second earliest 2008 tax freedom day (April 7).
Not all states with early tax freedom days have low after-tax income. For example, Alaska has the earliest tax freedom day in the nation and the sixth highest after-tax income. However, Alaska as an anomaly due to its ability to generate abundant public revenue from the petroleum industry. (Nearly two-thirds of state government revenue in Alaska is oil revenue.)
By and large, states with late tax freedom days tend to have high after-tax incomes and states with early tax freedom days tend to have low after-tax income. (The relationship between tax freedom day and after-tax income is statistically significant at the 0.01 level.) The aggregate per capita after-tax income among the five states with the latest tax freedom days (California, Connecticut, New Jersey, New York, and Washington) is 28 percent higher than in the five states with the earliest tax freedoms (Alabama, Alaska, Mississippi, Montana, and West Virginia).
At first, these findings may seem counter-intuitive. How can taxpayers in high tax states have higher after-tax income than taxpayers in low tax states? One possible explanation is that high-income states pay more federal income taxes, thereby pushing their tax freedom day later in the year. Another possible contributing factor is that high tax states have invested in education, transportation, public health, and other important public services and infrastructure in ways that promote an economy capable of sustaining high per capita income. Even after subtracting the higher per capita tax burdens, the incomes in these states generally exceed incomes in low tax states.
In general, states with late tax freedom days not only have higher after-tax income, but lower poverty rates, fewer working poor, and lower-infant mortality. A correlation with data from the 2007 Development Report Card for the States shows that states with late tax freedom days tend to score better on all three report card categories-performance, business vitality, and development capacity-than do states with early tax freedom days. Late tax freedom day states also tend to have a higher quality of life based on the 2008 Most Livable State report. (All of these relationships are statistically significant.)
This raises some important questions regarding the Tax Freedom Day report. Since states with late tax freedom days generally have higher after-tax income than states with early tax freedom days, what advantage is there to having an early tax freedom day? Given that residents of states with late tax freedom days generally have less poverty, better economic performance, and a higher quality of life, in what meaningful way are they any less “free” than residents of early tax freedom day states?
Minnesota’s 2008 tax freedom day is four days later than the national average-April 23. However, over the last five years the gap between Minnesota’s tax freedom day and the national tax freedom day has a narrowed somewhat. For example, in 2003 Minnesota’s tax freedom day was six days later than the national average; in 2002, it was seven days later.
So what does Minnesota have to show for its modest progress in reducing the gap between its tax freedom day and the national tax freedom day? Since 2003, Minnesota’s employment growth, unemployment rate, and poverty rate have each deteriorated relative to the national average. Furthermore, despite shrinkage in Minnesota’s tax burden relative to the national average, Minnesota’s per capita after-tax income has gone from 10 percent above the national average in 2003 to 4 percent above the national average in 2008. While Minnesota is still outperforming the U.S. average on most major economic indicators, the rest of the nation has clearly gained ground on us over the last five years.
The Tax Freedom Day report appears to do an adequate job of measuring taxes but a poor job of measuring freedom and economic well-being. The dark side of “tax freedom day” is that states with early tax freedom days are generally worse off than states with late tax freedom days. Minnesotans should be cautious of studies that imply a simplistic relationship between the level of taxes and the level of freedom.