Why California’s Income Tax Rate Is So High

If you are wondering why you have to pay so much money for state income tax in California, you are not alone. California has the highest income tax rate by far with a 13.3 percent rate. The state with second highest income tax rate is Hawaii, with a significantly lower rate of 9.9 percent. On the other hand, some states do not have an income tax rate at all, such as Texas. With these figures in mind, it is important to look at why the tax rate in California is so high compared to other states.

A Graduated Income Tax Schedule
While some Californians will pay 13.3 percent in income taxes, this rate is applied only to those who earn more than $1 million. The tax rate is significantly lower for lower income residents. For example, those who earn between $40,251 and $50,869 per year will be assessed state income taxes at a rate of eight percent. There is also a marriage benefit as well. The tax rates for married couples stay the same, but the income brackets are doubled. A better way to compare property taxes by state is to review the tax rate for your specific income bracket.

Other Types of State Taxes
First, the state income tax is not the only type of tax that states have. For example, California also has an average sales tax rate of 7.5 percent, but this varies based on the municipality. The property tax rate is limited to one percent for property tax, and there is no estate tax mandated by the state. Each of these taxes is designed to raise revenue for everything from schools and infrastructure to public services, the penal system and more.

Each State’s Unique Revenue-Generation System
California may rank highest in the area of income taxes, but it does not rank highest in the other areas. For example, several states do have a mandated state estate tax. Using Texas again as an example, the property tax rate in Texas may be closer to 2.5-3.6 percent depending on where the property is owned, and the sales tax rate is above eight percent in many areas. Some states have lottery sales, taxes on gambling winnings and more as well. While each state has a different method used to generate income, there also may be rules in place regarding the maximum rates that can be charged for each method. Population size, spending habits, income level and more in each state also can vary, and states must find a way to generate the amount of money needed with each of these factors in mind.

The Need for More Income
California is the most populated state in the country by far. In 2012, more than 38 million people lived in California. The state with the second highest population was Texas with 26 million residents. This means that California must provide services, infrastructure and more to an incredibly large number of people, and taxing income is one way to accomplish this. The state property tax is limited to one percent, and there is also a limit based on how much the taxes on a single property can increase from year to year. Income tax is a significant way to generate income in a way that is fairly equitable for most people. The highest tax rate is applied only to the highest wage earners, and this makes the taxation system much more onerous for wealthier individuals than those in the lower income brackets.

Financial planning, wealth management and a great tax strategy may help you to minimize the amount of taxes that you pay to the state. While some people have moved away from California in recent years to take advantage of life in a state with a lower cost of living, many prefer to stay in California. With the right strategy and financial plan, you can lower your tax burden and keep more of your hard-earned money in your pocket.