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Celebrating Minnesota’s Late Tax Freedom Day

April 30, 2013 By Jeff Van Wychen, Fellow and Director of Tax Policy & Analysis

A crowd of 600 anti-tax conservatives converged on the Capitol last Saturday to complain about Minnesota’s current level of taxes and to fret about proposed tax increases under consideration by state policymakers. The annual "Taxpayers Freedom Rally" typically falls near “Tax Freedom Day” or TFD. As calculated by the right wing Tax Foundation, the TFD represents the day when taxpayers have earned enough to pay off their total tax bill for the year. Minnesota’s 2013 TFD is April 23, the 7th latest in the nation and five days behind than the national TFD.

The TFD is calculated by determining total state, federal, and local taxes in each state as a percentage of the state’s income; the resulting percentage is then imposed on the calendar year to determine the date that taxpayers are “free” from the yolk of taxation. Various groups, including the Center for Budget & Policy Priorities and the Minnesota Budget Project have challenged the validity and interpretation of the TFD measurements. However, for the sake of argument, the following analysis will accept the Tax Foundation’s determination of the TFD in each state as a valid and reliable measure of the overall level of taxation in each state.

Forty-five days separate the state with the earliest TFD from the state with the latest TFD. Alas, pity the poor folk of Connecticut, who have the latest 2013 TFD in the nation; Connecticuters remain slaves to the state, federal, and local government until May 13 of this year. On the other end of the spectrum is Mississippi; the happy inhabitants of the Magnolia State are free from the bondage of taxation on March 28—the earliest TFD in the nation.

However, before leaping to conclusions about the plight of Connecticut taxpayers, we should consider that state’s per capita after-tax income relative to the rest of the nation. Older versions of the TFD report included data on total federal, state, and local taxes and total per capita income; using this data, it was possible to calculate the after-tax income of each state. Unfortunately, more recent versions of the TFD report omit this data. However, a reasonable proxy of after-tax income is “disposable personal income,” which is equal to total personal income minus current personal taxes; according to the U.S. Census Bureau, disposable personal income “is the portion of personal income that is available for spending and saving.”* The most current year for which disposal personal income data is available is 2010. The following analysis will compare 2010 disposable personal income data to the findings of the 2010 TFD report.†

Connecticut’s per capita disposable income in 2010 was $48,596—higher than any other state in the nation and 32 percent above the national average. Meanwhile, early TFD Mississippi had per capita disposable income of $29,155—21 percent below the national average. Minnesota—with its relatively late TFD—had per capita disposable income of $38,411, four percent above the national average and 15th highest in the nation.

If you perceive a pattern emerging, you’re right. Among the ten states with the earliest 2010 TFD, five rank among the bottom ten states in per capita disposable income. Conversely, among the ten states with the latest 2010 TFD, seven rank among the top ten in disposable personal income. The bottom line is that states with late TFDs consistently have higher after tax income than state’s with early TFDs.‡

The first of the following two maps is color coded to represent the 2010 TFD in each state, with early TFD states shaded white and late TFD states, such as Connecticut and Minnesota, shaded purple.  The second map is color coded to represent the 2010 per capita disposable income, with low per capita income states shaded white and high income states shaded green.


[ map: click link to view in browser ]  

Given that states with late TFDs are outperforming states with early TFDs in terms of per capita after-tax income, it’s hard to understand what the fuss about Tax Freedom Day is all about. In what meaningful sense are residents of late TFD states like Connecticut and Minnesota—with their relatively high after-tax income—any less "free" than less prosperous early TFD states?

Rather than bemoaning Minnesota’s late Tax Freedom Day, perhaps we should consider celebrating it—given its association with higher income and greater prosperity. This is something that the anti-tax protestors who visited the Capitol last weekend may want to think about.

* Consumption taxes (i.e., sales and excise taxes) are not subtracted from personal income in calculating disposable personal income. Using data from the U.S. Census Bureau, Minnesota 2020 has also analysed 2010 per capita disposable income after further subtracting out 2010 consumption taxes.

†As in 2013, Connecticut had the latest TFD in the nation in 2010 (April 27). Mississippi had the third earliest 2010 TFD (March 28), while Minnesota had the eighth latest (April 13).

‡The relationship between a state’s per capita disposable income and its TFD is statistically significant at the 0.01 level. In other words, there is less than a one percent chance that the relationship observed is accidental or random. If we further adjust disposable personal income to exclude consumption taxes, the relationship between a state’s adjusted per capita disposable income and its TFD remains statistically significant at the 0.01 level.

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