NC Budget and Tax Center

There is freedom in living in a state that is rich with opportunity

Each year the Tax Foundation puts together an estimate of when in the year high-income Americans — and residents in each state — have worked enough hours to pay their taxes on average.  They have determined that Tax Freedom Day for 2019 to be April 16.

While the Center on Budget and Policy Priorities (CBPP) has debunked their methodology with precision, as the excerpt shows below, the fundamental error in this consideration of taxes is that it fails to account for the opportunities — and, indeed, freedoms — that are provided through investing our public dollars in opportunities for all.  The very idea that one is more free when one works for themselves rather than for our collective well-being is flawed. It belies the reality that our own well-being is tied to that of our neighbor and that our economic strength comes from our ability to ensure every person can reach their full potential.

Of course, the Tax Foundation’s Tax Freedom Day calculation also goes a long way in demonstrating a fundamental problem with discussion of taxes in our country.  These discussions too often happen without talking about who pays, and the evidence is clear that North Carolinians with middle- and low-incomes pay a greater share of their income in total state taxes than those in the top 1 percent.

From the CBPP report:

“The report’s state-by-state estimates have at least four serious flaws that render them meaningless for discussing the taxes paid by typical households or assessing the tax choices by a given state’s policymakers:

• They overstate middle-class tax levels. About two-thirds of the taxes in the Tax Foundation calculations are federal taxes. The amount of federal tax paid by the residents of a state thus has a large impact on that state’s Tax Freedom Day. Since, as this analysis explains, the Tax Foundation 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 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 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 based on the residence of the consumers who purchase products that businesses sell (adjusted for taxes that tourists pay). This is likely to lead to further misimpressions about the impact of a state’s tax policies on the tax burdens its residents face. For example, when Alaska collects taxes from oil companies based on companies’ revenue and profits from Alaskan oil, the Tax Foundation does not count those taxes as part of Alaska’s revenue. Rather, it adds those taxes to the tax calculation in the states where oil is consumed. Maine residents, for example, consume a significant amount of fuel and so get allocated a large share of these Alaska taxes. Yet state legislators in Maine cannot have much impact on the level of taxes that Alaska or other oil-producing states levy on oil.

• They rely heavily on estimates, projections, and imputations from years-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, since — as the Tax Foundation itself indicated in a separate report in 2016 — ‘state-local tax burdens are very close to one another and slight changes in taxes or income can translate to seemingly dramatic shifts in rank.'”

Rather than embrace flawed theories of what will drive our economic success and well-being, it is time for policymakers to recognize the role that taxes play in building a thriving North Carolina and pursue policies that address the upside-down nature of who pays taxes in our state.

Alexandra Sirota is the director of the N.C. Justice Center’s Budget & Tax Center. 

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