15 Days of Cutting Your Tax Bill

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Countdown to Tax Freedom Day

Michael Katz

Editor's note: As a special feature for March, TheStreet.com is offering an ongoing series on everything you need to know about taxes. Today is part 15.

Here's something to cheer you up: This year you're working longer to pay your taxes. And only four other times in the past 25 years have you worked more for the government than this year.

At least that is according to the folks at the Washington, D.C.-based Tax Foundation, a nonpartisan group promoting tax education that annually calculates Tax Freedom Day.

Not to be confused with the day when everyone is free from paying taxes -- the day we die -- Tax Freedom Day marks the calendar day when the average American has worked long enough to have paid off his or her federal taxes for the year.

This year, that day is April 30. That is two days later than last year, and the latest the day has arrived since 2001.

"The economy has been growing at a good clip since mid-2003, and those growing incomes are pushing people into higher tax brackets," says Scott Hodge, president of the Washington, D.C.-based Tax Foundation.

"When that happens, tax collections grow faster than incomes."

According to Hodge, we shouldn't be surprised that the day we stop paying for Uncle Sam has been arriving later each of the past four years. There haven't been any major federal tax cuts since 2003, during which time the economy has been steadily growing.

And the national tax burden tends to increase with income as Americans are pushed into higher brackets.

Longer and Longer Tax Freedom Day is arriving later this year

Source: Tax Foundation

Calculating Tax Freedom

The idea of Tax Freedom Day was first conceived by Florida businessman Dallas Hostetler in 1948. "He was frustrated that people in Florida had no income taxes, but there were a lot of business taxes," says Bill Ahern, communications director for the Tax Foundation. "He wanted to show that it falls on individuals in a different way."

In 1971 Hostetler, who had been calculating the figure annually for more than 20 years, retired and passed along his creation to the Tax Foundation. He gave it the rights to the intellectual property of Tax Freedom Day in exchange for the group promising to continue the calculation in perpetuity.

To calculate when Tax Freedom Day arrives, the Tax Foundation divides the total figure for tax collections by the nation's income, using statistics from the Department of Commerce's Bureau of Economic Analysis (BEA).

To measure income, the foundation uses net national product, which the BEA defines as gross national product, minus the consumption of fixed capital.

For illustrative purposes, it assumes that income is earned evenly throughout the year and that taxpayers initially devote all of their earnings to paying their taxes. This year, taxes will amount to 32.7% of Americans' income.

The Tax Foundation then converts that percentage into days worked, starting on Jan. 1. This year, it would take 120 calendar days before Americans start keeping their earnings. The figure is also calculated to determine the Tax Freedom Day on a state-by-state basis.

Internal Revenue Nor'easter

While the national Tax Freedom Day is based on federal taxes, there are also individual Tax Freedom Days for each state, based on state and local taxes. As seen in the map below, most of the states with the heaviest tax burdens, and the latest Tax Freedom Days, are in the Northeast. In fact, the five states with the latest Tax Freedom Day are located in the region: Connecticut (May 20), New York (May 16), New Jersey (May 10), Vermont (May 9) and Rhode Island (May 9).

The states with the earliest Tax Freedom Days are Oklahoma and Alabama (April 12), Mississippi and Alaska (April 13), and Tennessee (April 15). That means that the average taxpayer in these states will have earned enough income to pay for this year's taxes -- just in time to pay last year's taxes.

State by State Here's how state-level Tax Freedom Days stack up

Source: Tax Foundation