Californians sweating to complete tax returns by April 15 may be unaware that another milestone occurs the very next day. California’s Tax Freedom Day will arrive on April 16. This should trouble Californians for a number of reasons.
For the nation as a whole, Tax Freedom Day arrives on April 12. This means Americans worked up to that day simply to pay the bill for federal, state, and local taxes.
However, this calculation ignores deficits, which are sizeable. If deficits (deferred taxes) are included, the Tax Freedom Day for the country jumps a full month and a half to May 23, one of the latest ever recorded. We’re working almost five months out of the full year just to pay the various levels of government. The news is even worse for Californians.
According to a new report by the non-partisan, D.C.-based Tax Foundation, California is tied with three other states – Washington, Wisconsin, and Minnesota – for having the fifth-latest Tax Freedom Day in the country. This means that in these four states, all the income earned prior to April 16 is consumed by federal, state, and local taxes.
Tax Freedom Day specifically measures the amount of income available in an individual state or nationally. It then compares the total tax bill incurred in each jurisdiction with the income available. 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 estimate for California is actually optimistic since the study assumes balanced budgets. But as every Californian knows, the state is facing a massive deficit of more than $25 billion. (It’s also unclear how this deficit will be resolved given the failure of the state government to secure a June ballot initiative to approve tax hikes, a central part of the governor’s proposal to balance the budget.)
In only four states is the total tax bill higher, relative to income available. If adjustments were made for deficits and borrowing, California’s performance would be even worse. Put simply, California is a high tax state, as a host of other studies confirm.
The Pacific Research Institute published a study last year analyzing California’s tax burden and design. California ranked dead last among the states. Similarly, the Tax Foundation’s 2011 State Business Tax Climate Index, ranked California 49th out of the 50 states on tax competitiveness.
California’s top income tax rate is now the third-highest in the country. Even our second-highest rate, which applies to income over $47,055, is higher than the top rate of all states except Hawaii, Oregon, and Rhode Island.
Our corporate income tax is the eighth-highest and our combined state and local sales tax is the second-highest in the country. Even property taxes in California are not all that competitive. Property taxes as a share of median income for homeowners was 3.6 percent in 2009, ranking California 15th in the country.
Taxes are also a key explanation why California’s unemployment rate – now 12 percent – is second-highest in the country and has been stuck at 12 percent to 12.5 percent since November 2009. California taxes too much and does so in a way that discourages investment and entrepreneurship, the very activities we need.
An April 16 Tax Freedom Day is a reminder to Californians that tax policy matters. When you discourage investment and entrepreneurship, you get less of it. For the Golden State to recover economic leadership and prosperity, we have to reduce the tax burden.
That means an earlier Tax Freedom Day and a redesign of our tax system so it encourages productive activities. Maybe then we can celebrate Tax Freedom Day instead of lamenting it as a reminder of California’s economic malaise.