The California Tax Foundation publication “California Tax Facts: An Overview of the Golden State’s Tax Structure” provides a comprehensive look at personal and business income taxes, sales and use taxes, property taxes, gasoline taxes, and other taxes imposed in California.
For businesses seeking to create jobs for Californians by locating or expanding in the state, taxes can be a major obstacle. According to studies that provide federal rankings, California has the third-worst state business tax climate in the United States.
The total sales tax rate is as high as 11.25 percent in some areas of the state, while the most populous city, Los Angeles, will have a total rate of 10.25 percent (beginning October 1, 2026). These rates are a combination of state and local taxes. At the state level, California levies a 7.25 percent general sales and use tax, the highest statewide rate in the nation. Local governments are permitted to levy additional sales and use taxes, and the combined rate of the additional local taxes generally should not exceed 2 percent. However, some local governments have been granted authority to exceed this cap. Click here for the California Department of Tax and Fee Administration’s detailed description of the statewide sales and use tax rate, and here for city and county rates.
Taxes on Manufacturing Equipment: More Expensive to Make Products in California
California imposes state and local sales tax on manufacturing equipment, with rates exceeding 10 percent in many areas of the state. While California provides a partial sales and use tax exemption for qualified manufacturing and research and development equipment purchases, manufacturers must still pay a portion of the statewide tax and all applicable local and district taxes. The partial exemption is scheduled to expire July 1, 2030. In 38 other states that impose a sales tax, manufacturing equipment is exempt from the tax, and five additional states do not impose a statewide sales tax. Those states have a significant competitive advantage when manufacturers are deciding where to locate or expand operations and where to create new jobs.
Software-as-a-Service (SaaS): Expanding the Sales Tax to Services
Effective January 1, 2027, California will extend the sales and use tax to electronically delivered prewritten software and Software-as-a-Service (SaaS). The tax applies to products used by businesses of all sizes throughout the economy, increasing the cost of software and digital services by the applicable sales tax rate. Because software is used at multiple stages of production and business operations, the tax will increase costs for employers, consumers, schools, and government entities while imposing new compliance burdens related to sourcing and reporting digital transactions.
Californians pay the highest gasoline taxes and regulatory costs in the nation. As of July 1, 2026, California’s gasoline excise tax is 63.4 cents per gallon, the highest state gasoline excise tax in the country. In addition, motorists pay the federal gasoline tax of 18.4 cents per gallon, state and local sales taxes, underground storage tank fees, and the costs associated with California’s climate programs. As of July 2026, California’s Low Carbon Fuel Standard adds approximately 22 cents per gallon, and the state’s cap-and-trade program adds approximately 24 cents per gallon, bringing the combined impact of taxes, fees, and regulatory programs to roughly $1.41 per gallon.
California’s fuel taxes and regulatory costs have increased substantially over the last decade and are among the highest in the nation. These costs are paid by motorists directly and also affect businesses that rely on transportation, resulting in higher costs for goods and services throughout the state’s economy.
California has the highest state personal income tax rate in the nation. California’s top marginal tax rate is 13.3 percent, including the 1 percent Mental Health Services Tax imposed on taxable income above $1 million. Hawaii has the second-highest top rate at 11 percent. California’s income tax system contains multiple brackets ranging from 1 percent to 13.3 percent, with the top rate applying to high-income taxpayers. Additionally, wage income is subject to the State Disability Insurance tax, at a rate of 1.3 percent in 2026.
Most small businesses are organized as S corporations, partnerships, or sole proprietorships and pay tax through the personal income tax system rather than the corporate income tax. As a result, many California small businesses are subject to some of the highest marginal state tax rates in the country.
California’s high property values generate substantial property tax revenues, even under Proposition 13, which generally limits annual assessed value increases for existing property owners to 2 percent. Despite limit, county assessment rolls continue to increase each year through new construction, changes in ownership, and this inflation adjustment. County assessors across California routinely report record-high assessed values and growing property tax bases that provide increasing revenue to local governments. Many California property owners also are required to pay costly parcel taxes, which are annual property taxes levied by school districts, special districts, and other local governments regardless of a property’s value.
California imposes a corporate income tax rate of 8.84 percent, one of the highest rates in the United States and the highest among the largest states in the West. Several states impose no corporate income tax at all, while others rely on alternative business taxes such as gross receipts taxes.
California businesses also face an increasingly complex tax environment. The 2026-27 state budget imposed limitations on the use of business tax credits, including the research-and-development credit, the California Competes tax credit, the film tax credit, and other incentives designed to encourage investment and job creation. The budget also expanded the sales and use tax to electronically delivered prewritten software and Software-as-a-Service (SaaS) beginning January 1, 2027, further increasing business tax costs across a wide range of industries. These actions are expected to cost taxpayers more than $14 billion annually.
