Freedom in the 50 States

State and local tax burdens are measured by calculating state and local tax revenues as a percentage of each state’s adjusted personal income, excluding taxes on motor fuel, mineral severance, alcohol sales, and tobacco sales.¹ Gas taxes are excluded because their freedom impact is contestable. To some extent, these taxes approximate user fees that are paid roughly in proportion to road use by the user, unlike other taxes.² Some states have higher gas tax revenues simply because their residents drive more, which is appropriate in a “user pays” system. Gas taxes could also represent a policy choice by states for purposes other than simply paying for the roads. We take no stand here on the question of the optimal gas tax. Severance taxes on natural resources such as hydrocarbons, minerals, and timber are excluded because they are paid by energy, mining, and timber companies that pass the costs on to consumers worldwide, not just to residents of the state where they operate. Alcohol and tobacco sales taxes are excluded because they are included in the personal freedom dimension. Personal income is the denominator because it represents the size of each state’s economy: it statistically correlates better with state and local revenues and expenditures than any other commonly used measure of economic size, such as gross domestic product (GDP).³

Adjusted personal income—personal income plus capital gains plus taxable pensions and annuities minus supplements to wages and salaries—is used to make our denominator as close as possible to the popular (but infrequently updated) tax burden measure from the Tax Foundation.⁴ The taxation variables therefore roughly represent the average tax burden that state taxpayers face.

We weight tax burden under the assumption that some taxpayers would consent to pay their full tax burden conditional on others doing the same, and some of what those taxes pay for does not diminish and may even enhance freedom (e.g., protection of rights). Some even advocate a higher tax burden, to pay for services they value.

To adjust for consented-to taxation, we take the following steps. First, we assume that the current tax burden in each state represents the ideal point of the median voter. Positive theories of democracy suggest that this is as good a guess as any about where public opinion lies.⁵ Then, half of the voters would prefer a higher tax burden (and the services it would finance) and half would prefer a lower tax burden. Right away, we can slash the tax burden weight in half, because half of the voters nationally would not see the taxes they currently pay as any diminution of their freedom at all.

This move assumes that the median-dollar taxpayer is the same as the median voter, but that is unlikely to be the case. In fact, the median-dollar taxpayer is likely to be somewhat wealthier than the median voter and thus more ideologically conservative and more hostile to taxation. Therefore, if anything, slashing the tax burden in half on these grounds is slightly too aggressive. We discuss our solution to this problem later in this section.

Before we solve that issue, we continue with the exposition. Of at least half of the taxpayers who would prefer a lower tax burden, most would not see all the taxes they pay as a diminution of their freedom. That is, conditional on others doing the same (absent the collective action problem), they would be fully willing to pay a lower tax burden that is greater than zero. To illustrate the logic, assume a normal probability density function over possible tax burdens, as seen in Figure 1.

On the x-axis of Figure 1 is tax burden, and on the y-axis is the proportion of the population corresponding to a particular view on tax burden. Fifty percent of the curve lies to the left or right of the mean of the tax burden distribution, which is 9.5, the actual national mean of state plus local tax burden. (We have drawn the curve under the assumption of a standard deviation of 2.375, a fourth of the mean, but nothing that follows hinges on this assumption. Note that the standard deviation of voters’ views on taxation should be significantly greater than the standard deviation of actual state tax burdens, because each state tax burden roughly represents a median of a distribution.)

This means more simply that, we guess, half of the voters are satisfied with tax burdens of 9.5 percent or higher, while half of the voters prefer tax burdens below 9.5 percent. Taxes take away the freedom of only the second group. Also, the vast majority of the second group does not want to get rid of all taxes. Only part of their tax burden reduces their freedom.

How much of their tax burden is a loss of freedom? We could imagine a “loss curve” that looks like a mirror image of the left side of the normal density function. In other words, those who want zero taxation will see all 9.5 percent of income taxed away as a loss of freedom; those who want taxation of 2.5 percent of income will see 7.0 percent of income taxed away as a loss of freedom, and so on. Half of all the taxes that people who prefer lower taxes pay does not take away their freedom if we assume a normal distribution of preferences over taxes. (The area under the loss curve is 0.5, like the area under the left side of the normal curve.) So only 4.75 percent of personal income, in total, is a loss to those who prefer lower taxation. We can divide the tax burden’s weight by 2 again, or by 4 in total. Then, we multiply by 1.1 to account for the fact that the median taxpayer is richer than, and likely more hostile to high taxes than, the median voter. Finally, in years before 2019, we multiply by 0.94 because the federal deduction for state and local taxes returned before the Tax Cuts and Jobs Act of 2017 was, on average, 6.0 percent of state and local taxes paid to taxpayers. For 2019 to 2022, we multiply by only 0.98, because the deduction now returns only 2.0 percent of state and local taxes paid to taxpayers.

The values in Table 1 represent the number of standard deviations better (lower tax) than the 2000–2022, 50-state average. Vermont looks abnormally poor on state taxes and good on local taxes because the state classifies all the property tax as a state tax, even though towns do have some control over the local rate. Because we reward states for fiscal decentralization, the net effect is to depress Vermont’s fiscal policy and overall freedom score slightly.