A recent study conducted by the Institute on Taxation and Economic Policy (ITEP) has found that California may not actually be as high tax of a state as it is often perceived to be. The study, titled “Who Pays,” analyzed the impact of state and local taxes on households across the income spectrum in every state. According to the study, Californian families with yearly incomes of $145,900 or less had overall tax burdens near the national average. This means that for the bottom 80% of income earners in California, the state’s tax rates are within one percent of the national average, making California an average-tax state for these scenarios, not a high-tax state.
However, as income grows, so does the tax burden in progressive tax states like California. For 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, in addition to federal income taxes. Conversely, the California state tax system is more beneficial for the bottom 40% of households, as they will spend less on state and local taxes compared to states like Texas and Florida. This group of taxpayers will bear a tax burden of 11.7%, which is slightly higher than the national average, but still lower than Texas’ 12.8% and Florida’s 13.2%.
One of the key factors contributing to California being considered a low-to-moderate-tax state is related to real estate. Although California homeowners pay high property taxes in terms of absolute dollars, the increase in property taxes is capped at two percent per year due to Prop 13. Additionally, homeowners aged 55 or older can transfer their home’s tax base up to three times under the new Prop 19. This could save many California homeowners thousands of dollars per year in property taxes if they choose to move in retirement. Despite high property taxes in CA, the state ranks ninth in terms of annual state and local taxes for a median household, with Texas and Florida ranking 32nd and 45th, respectively.
The study also revealed that the vast majority of state and local tax systems in the United States are regressive, with low- and middle-income families bearing a greater share of their income in taxes compared to wealthy families. In states with regressive tax structures, the lowest-income 20% pay three times as much of their income in taxes as the wealthiest 1%. The study also showed that states like Florida, Tennessee, and Texas, often described as “low tax” states due to their lack of personal income taxes, have some of the highest tax rates on low-income families. This trend is indicative of a broader pattern where states with lower taxes for high-income earners tend to have higher taxes for low-income residents.
