California Vs. Texas: Who Has Higher Taxes?
There has been a lot of press lately about people leaving California for lower tax rates and better living standards in Texas. Many large corporations, including Tesla, have moved some or all of their operations from California to Texas.
Meanwhile, California Governor Gavin Newsom proclaimed in January that "95% of Texans pay higher taxes than Californians".
Many factors come into play when assessing which state has an effective higher tax burden.
In their analysis, Wallethub found that the tax advantages for Texas residents vs. California are not as dramatic as one might think at face value. For example, Texas does not have a state income tax. However, it does levy relatively high consumption and property tax rates.
Wallethub concluded that Texas has a higher effective state and local tax rate than California for a median U.S. household. California's rate comes out to 8.97% while Texas is 12.73%
By this calculation, Illinois residents pay the highest taxes overall of any state at 15.05%. Californians pay 8.97% of a median U.S. income of 69,508 in taxes. Texans pay 12.73% Of the nine states without a state income tax; five have higher effective state and local tax rates on median income than California, including Texas.
When it comes to taxes, it is not that simple. Tax rates are very different from individual to individual.
Factoring in property taxes also complicates things. On the surface, California has much lower property taxes than Texas. The average price of a home in California is double that in Texas, so it evens out.
Unfortunately, getting to the bottom of this question about which state has higher taxes is further complicated by who is doing the calculations. Left-leaning progressive organizations tend to favor California. Right-leaning organizations tend to favor Texas.
The Tax Foundation sums it up this way: California’s top individual income tax rate is 13.3%, with a state and local tax burden of 13.5%. It also has an 8.84% corporate income tax rate, a 7.25% state sales tax rate, a max local sales tax rate of 2.5%, and an average combined state and local sales tax rate of 8.82%.
By comparison, Texas levies no individual income tax or corporate income tax. It levies a gross receipts tax. It also has a 6.25% state sales tax rate, with a maximum local sales tax rate of 2% and an average combined state and local sales tax rate of 8.2%.
California’s tax system ranks 48th on the Tax Foundation’s 2022 State Business Tax Climate Index, and Texas ranks 14. Texas comes out on top by its calculations.
California wins by the Tax Foundation's calculations. According to Jared Walczak, vice president of state projects at the Tax Foundation, the final bottom line is that when comparing effective rates with state-adjusted figures, California and Texas actually end up having reasonably similar tax burdens. For those keeping track, Texas loses this one. Texans pay 11.8% vs. Californians at 11.4%
What really stands out to me is that there is not as big a difference between the states as I have been led to believe. I've lived in both states. California was way more expensive when I lived in an apartment. When I bought a house, not so much.
It's really a lot closer than the hype.