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 10.75 percent in some areas of the state, while the most populous city, Los Angeles, has a total rate of 9.5 percent (as of April 1, 2023). 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 should not exceed 2 percent. However, some local governments have been given special dispensation to go above 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, at rates above 10 percent in many areas of the state, with only a partial, limited exemption available for manufacturers that meet specific qualifications (the purchaser must be engaged in a specific type of business, and the equipment must meet state requirements and be used in specific ways). This partial, limited exemption is scheduled to expire July 1, 2030, which further reduces its usefulness. In 38 other states that impose sales tax, manufacturing equipment is not subject to the tax, and five other states do not impose any sales tax. Those 43 states have a major competitive advantage over California when manufacturers are deciding where to launch or expand operations, and where to hire employees to operate the equipment and perform other functions.
Californians pay an additional 72.4 cents per gallon at the pump attributable to state and local taxes and fees, which is the highest in the nation. California’s state excise on gasoline is 57.9 cents per gallon (as of July 1, 2023). According to the nonpartisan Legislative Analyst’s Office, California’s cap-and-trade auction increases the price of gasoline by an additional 23 cents per gallon. The federal excise tax on gasoline adds another 18.4 cents per gallon to the cost at the pump.
California’s personal income tax has the highest top rate and one of the most highly progressive structures in the nation. California’s top rate is 13.3 percent (including the 1 percent surcharge for mental health programs, for all personal income taxpayers with taxable income over $1 million). Hawaii is second, with a top rate of 11 percent. Most small businesses are S Corporations, partnerships, or sole proprietorships, and pay their business taxes at the rates for individuals, which makes California’s taxes on small businesses some of the most burdensome in the nation. Seven states do not impose a personal income tax, and two others have very limited income taxes (New Hampshire taxes dividend and interest income only, while Washington taxes capital gains income only).
California’s high property values lead to high property taxes, even under Proposition 13, the 1978 voter-approved initiative that limits property taxes. Many California property owners also are required to pay costly parcel taxes, which are annual property taxes (not based upon the value of the property) imposed by many school districts, special districts and other jurisdictions.
California has the highest corporate tax rate in the Western United States at 8.84 percent. Only six states have a higher top corporate tax rate than California (Alaska, Illinois, Maine, Minnesota, New Jersey, and Pennsylvania). Six states do not impose any corporate income tax (four impose gross receipts taxes instead, and two – South Dakota and Wyoming – do not levy either of these taxes).