The Tax Foundation recently released its annual Tax Freedom Day calculations. The news emanating from the report should be cause for great concern for all Americans, and Californians in particular.
Tax Freedom Day represents the day when Americans begin to work for themselves after having paid their federal, state, and local taxes. Tax Freedom Day for the United States was April 13th but this calculation excludes deficits, which are simply taxes deferred to the future. Once deficits are included, Tax Freedom Day jumps a full month and a half to an astonishing May 29th. This is the latest Tax Freedom Day ever recorded and the only comparable period is 1944 and 1945, during World War II.
Even worse is the report’s news for California. Californians have the fourth latest Tax Freedom Day in the year: April 20th. All income earned prior to April 20th in California is used to pay federal, California state, and local taxes. This date excludes the federal deficit, which would put the California Tax Freedom Day into June, later than all states except Connecticut, New Jersey, and New York.
Let’s understand what Tax Freedom Day measures. It first examines the amount of income available in an individual state or nationally. It then compares the total tax bill incurred in each jurisdiction with income. The taxes include income taxes, social security taxes, sales and excise taxes, property taxes, corporate income taxes, estate and gift taxes, and other levies. In other words, Tax Freedom Day includes all sources of revenue to the federal, state, and local governments.
The trend for Tax Freedom Day (including deficits) is more than a little disturbing. Tax Freedom Day has consistently been later every year since 2000 when deficits are included. This is even more worrisome because these numbers do not include the future onslaught of higher taxes needed to finance Medicare and Social Security, assuming no fundamental reforms of these programs. The news is actually even more negative, however, because the report assumes the states’ budgets are balanced.
Examining California’s recent budget resolution results in the clear conclusion that the state’s budget is not “balanced,” and thus some current taxes are being deferred to the future. To solve the budget deficit for 2009-10, the state included $5.1 billion in borrowing (securitizing future revenues). To put these figures in context, total general fund revenues for 2009-10 are expected to reach $97.7 billion.
Two recent reports highlight California’s tax problems. The Tax Foundation’s 2009 State Business Tax Climate Index ranked California 48th out of the 50 states on tax competitiveness. The American Legislative Exchange Council’s Rich State, Poor States, 2009 Edition identified a number of tax problems for California including high marginal, personal, and corporate income tax rates, and relatively high sales taxes.
These explain, to some extent, why California has the seventh-worst record of domestic migration in the United States over the last five years. Some 1.1 million Californians voted with their feet and left the state over the last five years, and this trend is likely worsening.
California’s tax burden is not competitive and poses a serious economic threat to the state and its citizens. Californians know how damaging and destructive their state and local tax burdens are because we face them every day. Whether high state income and sales taxes or nominally high property taxes, Californians know we have a serious tax problem. Most state politicians, unfortunately, seem to have missed this reality. Let’s hope California’s Tax Freedom Day – yesterday, April 20th — reminds them of this imperative.