California taxes so much because the state funds one of the largest public sectors in the country through a steeply progressive income tax, while Proposition 13 holds property tax revenue well below what the state’s real estate values would otherwise generate. Personal income tax alone supplies more than 67 percent of General Fund revenue, and the top marginal rate of 13.3 percent is the highest of any state.1State of California. 2025-26 Budget Summary – Revenue Estimates That concentration is a deliberate policy choice, and it shapes nearly everything else about how California collects money.
The Income Tax Carries the Budget
California’s personal income tax runs through nine brackets, from 1 percent at the bottom to 12.3 percent at the top, with the dollar thresholds set in Revenue and Taxation Code Section 17041 and adjusted annually for inflation by the Franchise Tax Board.2California Legislative Information. California Code RTC 17041 – Personal Income Tax A separate 1 percent Mental Health Services Tax under Section 17043 applies to every dollar of taxable income above $1 million, enacted by voters through Proposition 63 in 2004 to fund county mental health programs. Stack them together and the top marginal rate is 13.3 percent.
Relying this heavily on one tax, assessed on a narrow slice of filers, is the structural reason California collects as much as it does from the people it collects from. The 67 percent dependence on personal income tax means lawmakers face less political friction when the budget needs more money, because any increase lands on the top brackets rather than on everyone. The cost of that approach is volatility: revenue surges in bull markets and tech booms and collapses in downturns, because the wealthiest filers’ incomes swing hardest.
Capital Gains Get Taxed as Ordinary Income
Unlike the federal system, California gives no preferential rate to long-term capital gains. Every stock sale, real estate profit, and business exit is taxed as ordinary income.3Franchise Tax Board. Capital Gains and Losses A liquidity event that pushes a return above $1 million gets taxed at the full 13.3 percent. For investors and founders, this is where California bites hardest, and it is a big part of why the state’s revenue is so sensitive to what the top of the income distribution is doing in any given year.
Proposition 13 Forces the Shift
California’s property tax works nothing like its income tax. Proposition 13, passed by voters in 1978, caps the annual property tax at 1 percent of assessed value. Assessed value starts at the purchase price (or the 1975-76 value for properties held continuously since then), and annual increases are limited to the inflation rate or 2 percent, whichever is lower.4California Legislative Information. California Constitution Article XIII A Section 2 – Tax Limitation
The practical effect: two identical houses on the same block can carry wildly different tax bills. A longtime owner whose assessed value has crept up 2 percent a year since 1990 pays a fraction of what a new buyer across the street pays at today’s market price. Because property tax revenue is structurally held below what California’s real estate values would otherwise generate, the income tax and sales tax have to make up the difference. That is the mechanical answer to why the other taxes are so high: one of the three legs of the stool is short.
Commercial properties get the same protection. Proposition 15, a 2020 ballot measure that would have reassessed commercial and industrial properties at market value while keeping residential properties under Proposition 13, was defeated. The cap still applies across the board.
What California Is Paying For
The money funds a public sector that is unusually large by state standards. California runs the largest public university systems in the country, covers millions of low-income residents through Medi-Cal, and maintains more lane-miles of highway than most countries. Taxing enough to pay for all of that, while leaving property tax revenue constrained, requires leaning hard on income and consumption taxes.
The sales tax reflects this. The statewide base rate is 7.25 percent, and local district taxes typically add another 0.10 to 2.00 percent, pushing the combined rate above 10 percent in some areas. The California Department of Tax and Fee Administration collects both the state and local shares.5California Department of Tax and Fee Administration. Detailed Description of the Sales and Use Tax Rate Groceries are exempt under RTC Section 6359, and children’s diapers have been exempt since January 1, 2020 under RTC Section 6363.9, with a comparable exemption for menstrual products.6California Department of Tax and Fee Administration. Revenue and Taxation Code 6363.9 – Childrens Diapers
Fuel taxes add another layer. California’s gasoline excise tax is 61.2 cents per gallon for the period running July 1, 2025 through June 30, 2026, among the highest in the nation, and it adjusts annually for inflation under SB 1, the 2017 gas tax law that voters upheld when they rejected a repeal attempt in 2018.7California Department of Tax and Fee Administration. Sales Tax Rates for Fuels8Governor of California. Fact Check – Claims Swirling on California Gas Prices Gasoline also carries a 2.25 percent sales tax plus any applicable local district tax.
Where the Burden Actually Lands
The lopsided design means the tax burden is distributed very unevenly. High earners and investors bear the heaviest income tax load, especially anyone realizing capital gains at scale. Recent homebuyers pay substantially more property tax than longtime neighbors in equivalent houses. And businesses face some of the highest effective rates in the country.
C corporations pay an 8.84 percent corporate income tax, while banks and financial corporations pay 10.84 percent. S corporations face a 1.5 percent entity-level tax (3.5 percent for S corporation banks). Every corporation doing business in the state owes an annual minimum franchise tax of $800 regardless of whether it earned anything. LLCs owe the same $800 floor plus a graduated fee tied to California-source gross receipts that reaches $11,790 for businesses grossing over $5 million.9Franchise Tax Board. Business Tax Rates For a small business operating at a loss, the $800 minimum is one of the more irritating features of the system.
Longtime homeowners, by contrast, often pay remarkably little. The gap between what they owe and what new buyers owe on comparable properties is one of the clearest distributional consequences of Proposition 13.
One Thing California Does Not Tax
California imposes no state-level estate tax and no inheritance tax. When a California resident dies, the estate faces only the federal estate tax, with no state layer on top. This is one of the few places where California is less burdensome than many other states, roughly a dozen of which do impose their own estate or inheritance tax.
The Federal SALT Cap Makes It Feel Worse
Part of why California’s taxes feel especially heavy is that federal law limits how much of them you can deduct. The Tax Cuts and Jobs Act of 2017 capped the state and local tax deduction at $10,000. Legislation passed in 2025 raised the cap to $40,000 for the 2025 tax year, with a 1 percent annual increase bringing it to $40,400 for 2026. For married couples filing separately, the cap is half.
The expanded cap phases out at higher incomes. Once modified adjusted gross income exceeds roughly $505,000 in 2026, the cap shrinks by 30 cents for every dollar above the threshold, bottoming out at $10,000. Many California residents earning well into six figures still cannot deduct their full state income and property tax payments. Before 2018, those deductions were unlimited, so the cap is effectively a tax increase on high-income Californians even though the state itself hasn’t changed its rates.
The Tradeoff in One Picture
California collects what it does because it has chosen to fund expansive public services through a tax system that concentrates the load on income (especially high incomes), leans on sales and fuel taxes to fill gaps, and leaves property tax revenue structurally capped. Longtime homeowners come out ahead. High earners, investors realizing capital gains, recent homebuyers, and businesses shoulder a disproportionate share. Whether the arrangement looks reasonable depends mostly on which side of it you are standing on.