Tax Foundation’s State “Tax Freedom Days” No More Valid than the Federal Version

Today the Tax Foundation released its list of when “Tax Freedom Day” allegedly arrives in each state.  It’s a deeply flawed and misleading exercise for a host of reasons.

Each state’s Tax Freedom Day – just like the federal version -- sharply overstates middle-class tax levels.  As my colleagues explained in an earlier post, the Tax Foundation calculates national Tax Freedom Day using an “average” tax rate that is likely higher than what 80 percent of American households actually pay.  That’s because the other 20 percent of upper-income households, many of them quite affluent, pay a big share of federal income taxes and drive up the average.  Because federal tax levels play a large role in the Tax Foundation’s state Tax Freedom Day calculations, the figures for each state also substantially exaggerate the tax bills of middle-class families in that state.

State Tax Freedom Day calculations tells us surprisingly little about state tax policy for two reasons.  First, the estimates reflect state affluence rather than state taxes.  Because we have a progressive federal tax system, states with higher numbers of very affluent households account for more federal taxes than states with fewer affluent households.  But that doesn’t mean that average households in those states are any more heavily taxed.

Second, the Tax Foundation measures a state’s overall tax level in part by the taxes that other states levy on its residents when they travel or import goods and services.  Alaska’s heavy taxes on oil production, for instance, are counted as taxes paid by energy consumers in the other 49 states.  Same for tourism taxes in Hawaii, gaming taxes in Nevada, and so on.

Finally, the estimates of state Tax Freedom Days for 2012 may be simply wrong – and they have been in the past. That’s because, together, many thousands of cities, counties, towns, school districts, and other local governments levy billions of dollars in taxes each year, and the only reliable source of data on all those taxes is several years old.  More up-to-date data on local taxes, however, wouldn’t solve the other problems with the foundation’s analysis.