The Tax Foundation

April 12, 2006

America's Tax Freedom Day Arrived April 26 in 2006

For immediate release
Media contact: William Ahern (202) 464-5101.

Tax Freedom Day^® fell on April 26 in 2006, according to the Tax Foundation’s annual calculation using the latest government data on income and taxes. (Click here to read the full study).

“Tax freedom will come three days later in 2006 than it did in 2005,” said Tax Foundation President Scott A. Hodge, “and fully 10 days later than in 2003 and 2004 when a combination of slow income growth and tax cuts caused Tax Freedom Day to arrive comparatively early, on April 16.”

However, 2006’s Tax Freedom Day is still considerably earlier than it was in 2000, when the economic boom, the tech bubble and higher tax rates pushed tax burdens to a record high, and Tax Freedom Day was postponed until May 3.

Tax Freedom Day, 1980-2006 (click for larger image)

“The economy has been growing at a good clip since mid-2003,” said Hodge, “and those growing incomes are pushing people into higher tax brackets. When that happens, tax collections grow faster than incomes.”

The report is Tax Foundation Special Report No. 140, “America Celebrates Tax Freedom Day®,” by Hodge and Tax Foundation economist Curtis Dubay. The report traces the course of America’s tax burden since 1900, examines the composition of today’s tax burden by type of tax, calculates a Tax Freedom Day for each state, and compares tax payments to other typical consumer expenditures.

Days Spent Working to Pay Various Taxes, 2006 (click to enlarge)

Taxes and Other Expenses
The report compares the number of days Americans work to pay taxes to the number of days they work to support themselves.

“Despite the tax cuts passed by the federal government recently, Americans will still spend more on taxes than they spend on food, clothing and housing combined,” said Hodge.

In 2006, Americans will work 77 days to afford their federal taxes and 39 more days to afford state and local taxes. That makes taxation a bigger financial burden than housing and household operation (62 days), health and medical care (52 days), food (30 days), transportation (30 days), recreation (22 days), or clothing and accessories (14 days).

Days Americans Work to Pay Taxes Compared to Other Expenses, 2006 (click to enlarge)

 Tax Freedom Day by State
Six out of the ten states with the heaviest tax burdens and the latest Tax Freedom Days are in the northeast: Connecticut (May 12), New York (May 9), New Jersey (May 6), Massachusetts (May 2), Maine (May 1) and Rhode Island (May 1). The other four are Washington (May 4), Minnesota (May 3), California (April 30) and Illinois (April 30).

Many of these states are taxed the heaviest and celebrate Tax Freedom Day later because of the progressive federal income tax. States with large metropolitan areas offer higher-paying jobs, and as a result, many of the citizens earn enough to pay income tax at the highest rates—currently 25%, 28%, 33% and 35%. As a result, they must work longer to pay their disproportionate share of the tax burden. Maine stands out as the exception. Its total tax burden is high despite low income and below-average federal taxes because of its unusually high state-local taxes.

The ten states with the lightest total tax burdens celebrate Tax Freedom Day the earliest. Alabama’s April 11 is the earliest of all. The next nine are Alaska (April 12), Mississippi (April 13), Oklahoma (April 14), Tennessee (April 14), New Mexico (April 15), South Dakota (April 16), Montana (April 16), Idaho (April 16) and West Virginia (April 17).

In most of these states, Tax Freedom Day is early because of a large number of low-income taxpayers who pay most of their federal income taxes at the lower rates, 10% and 15%. Alaska stands out as an exception: income and federal tax payments are above average there, but state-local taxes are extraordinarily low.

Tax Freedom Day by State, 2006 (click to enlarge)

Comparing State-Local Tax Burdens
While the Tax Freedom Day calculation includes all taxes, many analysts use the underlying data to compare state-local tax burdens in each state. (See tables below—more historical data available at www.taxfoundation.org/taxdata/show/335.html and www.taxfoundation.org/taxdata/show/336.html).

This year, the nation’s average state-local tax burden will be 10.6 percent of residents’ income, with the highest being Maine’s 13.5 percent and the lowest being Alaska’s 6.6 percent.

How Tax Freedom Day is Calculated
Tax Freedom Day answers the basic question, “What price is the nation paying for government?” We divide the most authoritative figure for total tax collections by the most authoritative figure for the nation’s income. The answer this year is that taxes will amount to 31.6 percent of our income. We convert that percentage into days worked, and if we started on January 1, it would take until April 26. That’s when we could start keeping some of our earnings. Income and tax data are then parsed out to the states, yielding 50 state-specific Tax Freedom Days.

The Department of Commerce’s Bureau of Economic Analysis (BEA) is the most authoritative source of income and total tax collection data. For its income measurement, the Tax Freedom Day report uses Net National Product as income, which among BEA’s measures of income is most appropriate for comparison to tax collections. Critics of the Tax Freedom Day report have tried to make much of BEA’s exclusion of capital gains from Net National Product. BEA’s decision is wholly consistent with mainstream economic thinking, and the difference, usually around 1 percent, is small in any case. (Additional discussion of technical issues can be found in the full Tax Freedom Day report, and at www.taxfoundation.org/publications/show/1406.html).

The Tax Foundation is a nonpartisan, nonprofit tax research organization that has monitored fiscal policy at the federal, state and local levels since 1937.

Click here to read the full study.

(For more information, please contact William Ahern at (202) 464-5101.)

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