“Tax Freedom Day” Analysis is Flawed

Happy “Tax Freedom Day,” New Jersey!

In April, the Tax Foundation released its annual “Tax Freedom Day” report, designed to represent the number of days into the year people must work to earn enough money to pay the average federal, state and local tax bill. According to the Tax Foundation, New Jersey is one of the last states in the nation to achieve this milestone. It is important to note that there are some serious problems not just with this report, but with the entire concept of “tax freedom.”

A healthy debate on taxes is welcomed, but not if it begins with the misconception that New Jerseyans derive no benefit whatsoever from the goods and services that government provides. And it certainly doesn’t help to frame such a complex issue around a campaign that plainly reinforces anti-tax rhetoric at the expense of appropriate levels of nuance.

Here are some important things to keep in mind about “Tax Freedom Day”:

The Idea of ‘Tax Freedom’ is Nonsensical
The Tax Foundation’s report says that people spend part of the year working for the government, and then obtain “freedom” and work the rest of the year for themselves. But the reality is that taxes pay for services that New Jerseyans use each and every day. Few New Jerseyans would feel more “free” if the tradeoff for an earlier-in-the-year “Tax Freedom Day” was paying tolls to use every road, having fewer police officers and firefighters, closed public parks, and no public schools for their kids.

The Tax Foundation’s State Estimates Are Seriously Flawed
The Tax Foundation’s proclamations of state “Tax Freedom Days” are meaningless because the report’s state-by-state estimates are flawed. They are not useful for discussing the level of taxes paid by typical households or for assessing the tax choices made by a given state’s policymakers, for at least four reasons:

  • They overstate middle-class tax levels: About two-thirds of the taxes in the Tax Foundation’s calculations are federal taxes. The amount of federal taxes paid by the residents of a state thus has a large impact on that state’s “Tax Freedom Day.” Since the Tax Foundation’s methodology substantially overstates the federal tax burden of middle-class families, the “Tax Freedom Day” figures for each state also substantially exaggerate the tax burdens of middle-class families in that state.
  • They reflect state affluence rather than state taxes: Because the federal income tax system is progressive, states with greater numbers of high-income residents – like New Jersey  – pay more federal taxes than states with fewer high-income residents. As the Tax Foundation acknowledges, “This means higher-income states celebrate Tax Freedom Day later.” Yet by trumpeting state-level “Tax Freedom Days” that differ across the states, the Tax Foundation’s presentation is likely to lead to the misimpression that state and local policies account for the differences, when that is not the case.
  • They include taxes paid in other states: The Tax Foundation uses a procedure to allocate state corporate, severance and tourism taxes that leads to further misimpressions about the impact a state’s policies have on the amount of taxes its residents face.
  • They rely heavily on old data: While the Tax Foundation uses Congressional Budget Office (CBO) data to project total federal tax collections, there is no equivalent of the CBO for state and local governments. Rather, the Tax Foundation uses its own proprietary (non-public) model to estimate taxes that will be collected during the year in tens of thousands of state and local jurisdictions around the country. This model is based in part on data that are several years old. If the estimates turn out to be even slightly wrong, the rankings are likely to be completely askew.

For more on the Tax Foundation’s report, see this Center on Budget and Policy Priorities paper: https://www.cbpp.org/research/federal-tax/tax-foundation-figures-do-not-represent-typical-households-tax-burdens-2