A recent study conducted by the Institute on Taxation and Economic Policy (ITEP) has found that California may not actually be as high-tax as it is often portrayed to be, especially for middle-class and lower-income households. While California does have the highest marginal tax rate in the nation at 13.3%, only certain households end up paying this rate. In fact, families in California with incomes of $145,900 or less tend to have overall tax burdens near the national average, with tax rates only slightly above the average for the bottom 80% of income earners.
However, as income levels rise, so does the tax burden in California. The next 15% of income earners in the state, with incomes between $145,900 to $352,300, are expected to owe around 10.8% of their income in state taxes. This is in addition to federal income taxes, making California an average-tax state for people in this income range. On the other hand, the state tax system in California tends to be more beneficial for the bottom 40% of households, as they often pay less in state and local taxes compared to states like Texas and Florida.
A major factor contributing to California’s status as a low or moderate tax state is its property tax laws, particularly Prop 13 which caps the increase in property taxes at two percent per year. While property taxes in California may be high in absolute dollars due to expensive housing, as a percentage of home values, they are relatively low. Additionally, homeowners aged 55 or older can now transfer their home’s tax base up to three times thanks to Prop 19, potentially saving them thousands of dollars per year in property taxes.
California’s high cost of living is a well-known factor that impacts residents across the state, with million-dollar homes being common in many areas. Despite this, some careers pay more in California than in other states, making it a desirable place to live for some. The study also highlighted the regressive nature of state and local tax systems in the US, with low- and middle-income families paying a much greater share of their income in taxes than wealthy families. States with regressive tax structures such as Florida, Washington, and Texas often levy higher tax rates on low-income families, highlighting the need for tax reform to create a more equitable system.
