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“Tax Freedom Day” Concept Is Flawed and Ignores the Value of Shared Public Investments

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From the Budget & Tax Center, a Project of the North Carolina Justice Center 

The Tax Foundation has deemed April 10, 2013, as “Tax Freedom Day” for North Carolina. As this memo explains, flawed analysis makes this designation essentially meaningless. The Tax Foundation also fails to acknowledge that taxes pay for public investments that North Carolinians expect and rely on, like education, transportation and public safety.

Tax Freedom Day Analysis Is Flawed

The Tax Foundation claims that “Tax Freedom Day” is the day when North Carolinians – in aggregate – will have earned enough income to fully pay their federal, state and local taxes. (The group deems April 8th as national “Tax Freedom Day.”) The tax freedom day designation is not useful for discussing how much a typical family pays in taxes or for evaluating state tax policies or proposals, for a number of reasons:

  •     The Tax Foundation overstates middle class tax rates. The Tax Foundation calculates an “average” federal tax rate – 19.2% in 2013 — that is far higher than what a typical household pays. That’s because it is skewed by very high-income taxpayers. In fact, about 80 percent of all households will pay a smaller share of their income in federal taxes, according to estimates by the nonpartisan Urban-Brookings Tax Policy Center. This flawed federal calculation is used to formulate state tax freedom days.  As a result, North Carolina’s designated “tax freedom day” substantially exaggerates the taxes paid by most families in our state.
  •     The Tax Foundation includes taxes paid in other states. North Carolina lawmakers can’t control taxes charged on goods and services produced in other states. But in the Tax Foundation’s model, state corporate, severance, and tourism taxes are allocated to states based solely on the residence of the consumers. This is likely to distort the Tax Foundation’s estimate of residents’ tax bills. For example, when a state such as Alaska collects taxes from oil companies based on their revenue and profits, the Tax Foundation adds those taxes to the tax calculation in states where oil is consumed, according to an analysis by the Center on Budget and Policy Priorities.
  •     The Tax Foundation model has proven to be wrong in the past. The Tax Foundation uses its own proprietary model to estimate state and local taxes that will be collected during the year. The estimates have proven to be inaccurate in the past when compared to actual data published by the Census Bureau.

The Missing Half of the “Tax Freedom Day” Narrative

The Tax Freedom Day concept ignores what should be a major part of any tax discussion: that taxes pay for public investments that North Carolinians expect and rely on — and that benefit everyone — like education, transportation and public safety.

  •     North Carolina has traditionally been viewed as a leader among Southern states for its commitment to public investments that promote economic opportunity for all. North Carolina’s investments in early learning, its university and community college systems, workforce development and training, and its roads and infrastructure has been seen as a national model. These public investments are supported with the tax contributions of North Carolinians, helping create a desirable state to run a business and raise a family.
  •     State tax collections are at a 40-year low as a share of state residents’ income. Proponents of cutting and eliminating taxes contend that North Carolina has a spending problem. This argument does not match the facts. In response to the Great Recession, significant cuts have been made to public investments that serve as the foundation for economic growth – public schools, higher education, transportation and infrastructure. State spending has yet to reach pre-recession levels and the state’s tax system is less and less able to raise adequate revenue to meet the needs of North Carolinians.
  •     Cutting taxes is not an effective way to create jobs, economic growth. As North Carolina continues to recover from the Great Recession, proponents of cutting taxes claim that doing so actually increases revenue and boosts economic growth. The evidence is overwhelming that this is not the case. There is no evidence of a direct relationship between top tax rates and economic or job growth.   An educated workforce and the presence of research centers like major universities boost per capita income growth. Efforts to drastically reduce and eliminate tax rates will likely cause the state to suffer in the long run due to a lack of resources needed to invest in education and other building blocks of economic growth.