Depending on where you fall on the income scale, California may not actually be that high tax of a state. For many in the middle class and below, California may let you keep more of your hard-earned income than many other states, according to a new study, “Who Pays” from the Institute on Taxation and Economic Policy (ITEP). While California has the highest marginal tax rate in the nation at 13.3%, only some households pay this rate on their income. That doesn’t stop so-called low-tax states like Texas and Florida from blasting the tax policy of the Golden State.
Who Pays Less Taxes in California?
According to the study, Californian families whose yearly incomes are $145,900 or less had overall tax burdens near the national average. At this income level (assuming no other tax deductions), your last $10,000 of income, or so, would reach the 9.3% tax bracket. ITEP, which conducted this study, considered the impact of state and local taxes on households across the income spectrum in every state. The conclusion was that very few states can be called high-or-low-tax states across the income spectrum.
As income grows, so will your tax burden in progressive tax states like California. If you fall in the bottom 80% on the income scale- households earning less than $145,900- California tax rates are within one percent or so of the national average. California would be an average-tax state for these scenarios, not a high-tax state.
The story changes as you move up the income scale. The next 15% of income earners in California, families with incomes between $145,900 to $352,300, will owe around 10.8% of their income in state taxes this year. This is on top of federal income taxes.
California State Taxes For Bottom 40% Of Earners
The California state tax system is even more beneficial for the bottom 40% of households. According to this study, this group of taxpayers will spend less on state and local taxes in California than Texas or Florida. For middle-and-lower-class earners, the biggest tax burden often comes from consumption taxes as well as property taxes on their homes and cars. In California, luckily, a smaller percentage of our income is eaten up by these expenses. This may be partly due to Prop 13, which caps the increase in property taxes each year at two percent, regardless of how much a property has increased in value.
Those in the bottom 20% of income earners or those making less than $25,200 will pay 11.7% in taxes in California. While this is still slightly higher than the national average, it is well below Texas’ 12.8% and Florida’s 13.2%. WalletHub has also reported similar findings. They reported that the annual state and local taxes for a median California household cost $9,612, making Californian’s tax burden the ninth highest in the country. Texas and Florida ranked 32nd and 45th, respectively. Tax burden is the property, individual income, and sales and excise tax as a share of personal income.
Where California Is A Low-Tax State
There are a few ways California can be considered a low-to-moderate-tax state. Most of these ways are related to real estate. In absolute dollars, California homeowners pay high property taxes. However, as a percentage of the homes’ values, it tells a different story. Thanks to Prop 13, the increase in property taxes is capped at two percent per year. Housing has been expensive for decades in CA, so your property tax bill may still feel painful when being paid. However, the longer you are in your home, the more likely you will pay less in property taxes than in other states.
California also lets homeowners aged 55 or older transfer their home’s tax base up to three times. This is thanks to the new Prop 19. There are a slew of rules to follow to get this huge tax break, so consult your fiduciary financial planner to ensure you stay in compliance. This could save many CA homeowners thousands of dollars per year in property taxes if they choose to move in retirement.
Yes, California Has A High Cost Of Living
A million-dollar home in most of California will look very different than in many other parts of the country. Some careers pay more in CA than in other states; some don’t. Whether you choose to reside in CA or not is up to you, your financial goals, and your ability to thrive here.
Most of my family lives in Southern California. My great-grandfather opened our family business in LA County way back in 1922, and it lasted for over 90 years. I’ve never quite mastered dressing for the cold, and I’m not sure, at my advanced age, I ever will. So, I guess I’m stuck enjoying the California weather, high taxes or not.
Other Key Findings From The Who Pays Study:
- The vast majority of state and local tax systems are regressive, or upside-down. This requires a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax in many states and a heavy reliance on consumption taxes contribute to this effect.
- In the 10 states with the most regressive tax structures, the lowest-income 20 percent pay three times as much of their income in taxes as the wealthiest 1 percent. In Florida, home to the nation’s most regressive tax system, low-income families pay almost five times as much as the wealthy. After Florida, the next most regressive tax codes can be found in Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana.
- States described as “low tax” are often high tax for low-income families. States such as Florida, Tennessee, and Texas are often described as “low tax” due to their lack of personal income taxes. While this characterization holds true for high-income families, these states levy some of the nation’s highest tax rates on the poor. This is indicative of a broader pattern. Nationally, we find evidence that states with lower taxes for their highest-income earners tend to have higher taxes for their lowest-income residents.
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