howardnlby Howard Stephenson
This year Americans had to work from January 1 to April 19 just to pay all of the federal, state and local taxes they owe, according to calculations by the Tax Foundation of Washington, D.C. using the latest government data on income and taxes. Tax Freedom Day in 2003 was celebrated on April 19th. That is the same date for Tax Freedom Day in 2002, but 8 days earlier than in 2001, and 11 days earlier than in 2000.

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. Every dollar that’s officially called income by the government is counted, and every payment to the government that is officially considered a tax is counted. Taxes at all levels of government are included, whether levied by Uncle Sam or state and local governments. Tax Freedom Day gives Americans an easy way to gauge the overall tax take, a task that can be quite daunting due to the many taxes at each level of government, especially the “hidden” taxes and fees that are often buried in the cost goods and services purchased by consumers.

According to the Tax Foundation two factors combined to make the average American tax burden lighter in 2003, federal tax reductions in 2001 and 2002 and a slower economy.

The good news of an earlier tax freedom day in recent years is overshadowed, however, by the fact that Americans still work longer to pay for government than they work for food, clothing, and shelter combined. In other words, taxes are the biggest major budget item in the typical American family’s budget. Only in the last decade have taxes exceeded spending on these basic necessities, and federal taxes alone cost Americans more than any other major budget item.

Utah’s Tax Freedom Day for 2003

The Tax Foundation also calculates tax freedom day for each of the fifty states. Utah’s tax freedom day this year is April 16, three days earlier than the nation tax freedom day. But Utah’s slightly better tax ranking is not due to favorable state and local taxes (the Tax Foundation ranks Utah state and local taxes 9th highest in the nation for 2003). Instead, Utahns pay proportionately lower federal income taxes than most of their counterparts in the rest of the nation, yielding an overall ranking of 20th highest in combined federal, state and local taxes. Utah federal taxes are relatively low because of larger families, lower average wages, and higher mortgage and charitable deductions.

The Tax Freedom Day Historical Roller Coaster

The United States has historically been a low-tax country. From the founding of the republic until the early part of last century, total government spending at the federal, state, and local levels rarely exceeded 10 percent of national income, except during wartime. At the turn of the last century, taxes accounted for just 5.7 percent of income, and as a result, the nation celebrated Tax Freedom Day on January 20.

The tax burden hardly changed between the turn of the century and World War I, and Tax Freedom Day was celebrated in late January every year. After 1917, federal taxes more than tripled to fund the war effort, and in 1921 the tax burden reached an all-time high, with taxpayers working until February 20 before earning enough to pay their taxes. In the aftermath of World War I, the tax burden fell significantly, especially in 1922 and 1923, but it never reached its pre-war levels. For the rest of the 1920s, Tax Freedom Day fell during the first week of February. Beginning in the 1930s, the massive expansion of government called for by President Roosevelt’s New Deal in response to the Great Depression pushed Tax Freedom Day later and later on the calendar, reaching March 3 by 1940. America’s entry into World War II accelerated the growth of taxes, and in five short years Tax Freedom Day had been postponed nearly a month to March 30 in 1945.

Just as taxes fell after World War I, so they fell for a few years after victory in Japan and Europe. As a result, Tax Freedom Day moved from March 30 in 1945 to March 20 in 1949. In the decades that followed, the date on which the average American could claim freedom from taxes gradually moved further into the year. During the fifties, Americans added 19 days of work to their tax burden, celebrating Tax Freedom Day on April 8 in 1960. The Vietnam War, coupled with the Great Society programs of the 1960s, increased the total tax burden to well over a quarter of the nation’s income, pushing Tax Freedom Day to April 16 by 1970. The tax burden remained fairly constant during the 1970s, and in 1980, April 19th was Tax Freedom Day.

Americans got some tax relief during the mid-eighties. The Economic Recovery Tax Act of 1981, coupled with tax relief efforts at the state and local levels that were spurred on by the passage of Proposition 13 in California, caused Tax Freedom Day to recede during 1982, 1983 and 1984. Such tax relief was short-lived, however, as Tax Freedom Day was pushed to later dates after 1985. By 1989, the tax burden had again reached the record high set in 1981, and Tax Freedom Day fell on April 21.

Since coming out of the recession in the early 1990s the tax burden borne by Americans has grown markedly, and Tax Freedom Day has tracked this trend. In the relatively short span between 1994 and 2000, the time that Americans spent working for government increased 9 days and almost pushed into May for the first time. In 1995 the nation’s Tax Freedom Day arrived 113 days into the year on April 23. The next year taxes crept up, and Tax Freedom Day fell one day later on April 24. In 1997, Tax Freedom Day jumped two days to April 26, and 1998 and 1999 each added a day’s worth of work to the tax burden. Taxes grew again in 2000, and for the first time, the nation’s tax burden was 33 percent of national income, pushing Tax Freedom Day to April 30.

The real culprit behind the recently expanding tax burden is federal taxes. After the country came out of the recession in the early 1990s, the federal tax burden grew by 10 days’ worth of income between 1990 and 2000. In stark contrast, state and local tax burdens remained virtually unchanged.

Why the difference? From the end of the recession in the early 1990s until 2001, the economy and stock markets boomed and so did government tax collections. Since the federal tax system is more progressively designed than those of state and local governments, the growth in personal income fills federal coffers at a faster rate.

At the same time, state and local governments were more responsive to constituent demands and legal mandates calling for the return of budget surpluses to the taxpayers. Most states trimmed their surpluses during the boom with tax refunds and rate reductions. While the federal government did enact a modest tax reduction in 1997, nothing noticeably slowed the growth of the federal tax burden in the last years of the decade.

2001–2003: Tax Freedom Day Celebrated Earlier

Just as the 1990s began with a weakening economy, so did the new century. By mid-2001 the economy was in recession, stock markets were in retreat, and for the first time in a decade tax burdens contracted. Especially hard hit were corporate profits and stock markets, which caused corporate income tax and capital gains collections to nose-dive. At the same time, President Bush success – resulting in a significant net tax decrease over the next three years before becoming a minor net tax increase in later years.

As a result of the recession and tax relief, the nation’s tax burden has been on a downward trend since the 2000 peak, causing Tax Freedom Day to arrive eleven days earlier. In 2001, Tax Freedom Day fell on April 27, three days earlier than in 2000. This was followed by the biggest one-year drop in the tax burden since 1922. In 2002, Tax Freedom Day was celebrated on April 19, eight days earlier. In 2003, Tax Freedom Day is holding steady on April 19—returning America’s tax burden to its 1992 level.

The Forecast If Bush’s Tax Cuts Are Adopted

If President Bush’s newest proposal for retroactive tax relief in 2003 is enacted, Tax Freedom Day could move back by eight days from current forecasts by 2013. This year’s Tax Freedom Day would be one day earlier, April 18. In 2004, Tax Freedom Day would fall another two days to April 16, rivalling the earliest dates achieved by the Reagan tax cuts in the early 1980s.

After 2004, a projected economic recovery would result in rising incomes and tax collections. By 2011, Tax Freedom Day would fall five days later on April 21, still three days earlier than the current-law forecast. However, since the current Bush proposals would make his earlier tax cuts permanent, there is no large increase in the tax burden after 2010. In fact by 2013, only two more days’ worth of work would be added to America’s tax burden, and Tax Freedom Day would be celebrated April 23. That is eight days earlier than the current-law forecast for Tax Freedom Day in 2013.