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Americans are letting out a collective sigh of relief as Tax Day 2011 is now behind us. The last thing most people want to think about right now is next year’s taxes. However, April 17th was not only Tax Day for income earned last year, but also Tax Freedom Day for income earned this year. This coincidence is a subtle reminder that we can never really stop thinking about taxes. Every year, the Tax Foundation — a D.C. based non-partisan tax research group — calculates the average number of days that Americans must work to earn enough money to pay their federal, state, and local tax obligations. According to the group’s latest report, on average Americans must work 107 days in 2012 to cover their taxes. Based on a 365-day calendar year, this means that all the income earned in 2012 through April 17 goes to taxes. How large is the 2012 tax bill for it to consume 107 days’ income? The Tax Foundation estimates the figure at $4.04 trillion, the equivalent of approximately 29.2% of total income. This includes $2.62 trillion in federal taxes and $1.42 trillion in state and local taxes. Of course Tax Freedom Day 2012 does not necessarily fall on April 17 for everyone. That date is simply an average for all taxpayers. The U.S. tax code is progressive — taxing higher income earners at higher rates — and the many local and state governments across America charge different tax rates. Therefore, individuals’ actual Tax Freedom Day depends upon how much they make and where they live. Tax Freedom Day arrived on March 31 this year in Tennessee, the earliest of any state and a full 17 days before the average for the nation as a whole. A main reason is Tennessee’s low tax burden overall and its 0% tax rate on individuals’ ordinary income. Tennessee was followed by other low-tax states including Louisiana, Mississippi, South Carolina, and South Dakota — all of which celebrated Tax Freedom Day before April 5. On the opposite end of the spectrum, Tax Freedom Day has not yet come to several states. It arrives especially late for several states in the Northeast, where state and local tax rates are high and residents earn above-average incomes. New Jersey residents will work until May 1 to pay their taxes, while New Yorkers will not earn enough to cover their taxes until May 2. Tax Freedom Day arrives the latest in Connecticut, where residents must work until May 5 to afford their annual tax bill. In 2013, states like New Jersey and New York could be the norm for the rest of the country. On January 1, 2013, numerous federal tax cuts are set to expire unless Congress and the President take action. The increased tax burden associated with these higher rates — approximately $500 billion — would delay Tax Freedom Day in 2013 by 11 days. A Tax Freedom Day in late April 2013 would be reminiscent of 2000, when America experienced its latest ever Tax Freedom Day, on May 1. Recently, the 4% Growth Project held a conference that highlighted the importance of tax competition to economic growth. We learned that low-tax states like Tennessee tend to grow faster than states that impose higher rates. The same can be said of towns, nations, and markets. As we close the books on the 2011 tax season, for the sake of our economy let’s hope Tax Freedom Day comes earlier in 2013 than it did in 2012.
Matthew Denhart is an expert on immigration policy and is the author of the Bush Institute’s America's Advantage: A Handbook of Vital Immigration and Economic Growth Statistics, now in its third edition. He currently serves as executive director of the Calvin Coolidge Presidential Foundation and is a founder of the Coolidge Scholars Program which provides full-ride merit scholarships to America's most promising college students. A summa cum laude graduate of Ohio University, Denhart has written and spoken widely on a variety of policy topics including the economics of higher education, labor, and taxes. He has contributed articles to numerous national publications including The Wall Street Journal, Forbes.com, CNN Opinion, and Bloomberg View.Full Bio
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