California's top income tax rate is 13.3%, the highest in the nation, because the state funds its own schools, healthcare programs, and infrastructure without relying as heavily on federal money as other states do

California collects more tax revenue per capita than most states because it has chosen to fund public services—K-12 schools, community colleges, Medicaid, roads, and courts—largely through state income tax rather than property tax, sales tax, or federal grants. The 13.3% rate applies only to the highest earners (those making over $680,000 in 2024), but California's tax brackets are steeper throughout the income scale than in most other states. Even middle-income earners pay a higher percentage of their income to California than they would in neighboring states like Nevada or Texas, which have no state income tax at all.

The state also taxes capital gains—investment profits—at the same rate as ordinary income, which means wealthy residents and investors pay the top rate on stock sales and real estate transactions. This structure generates significant revenue but also makes California's tax burden feel heavier to people who earn money through investments rather than wages.

Key Takeaways

  • California's 13.3% top income tax rate is the highest in the United States, applied to income above roughly $680,000 per year.
  • The state funds most of its schools, healthcare, and infrastructure through income tax rather than property tax or federal money, which is why the rate is steep.
  • Middle-income earners in California pay a higher percentage of their income in state tax than residents of most other states, not just the wealthy.
  • California taxes investment income and capital gains at the same rate as wages, which increases the tax burden on people who earn money through stocks or real estate sales.
  • Proposition 13, passed in 1978, capped property tax increases, which shifted the state's reliance toward income tax to pay for public services.

How California's Tax Brackets Compare to Other States

California's income tax brackets are progressive, meaning the rate increases as income rises. A single filer earning $75,000 in California pays roughly 9.3% state income tax on the amount above $20,000, while the same earner in Texas pays zero state income tax. In Florida, also zero. In New York, roughly 6.85%. The difference compounds for higher earners: someone making $250,000 pays about 11.3% in California, compared to 6.85% in New York and zero in Texas.

Seven states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. Nine others have a top rate below 6%. California's 13.3% rate stands alone at the top. Even high-tax states like New York (10.9%), Vermont (8.75%), and Oregon (9.9%) charge less than California's maximum rate.

Why Proposition 13 Shifted California Toward Income Tax

In 1978, California voters passed Proposition 13, which capped property tax at 1% of a home's assessed value and limited annual increases to 2%, even as property values climbed. The measure was popular because it protected homeowners from skyrocketing property tax bills during a real estate boom. But it also cut off a major source of state revenue at a time when California was growing and needed money for schools and services.

To replace that lost property tax revenue, the state gradually increased income tax rates over the following decades. By the 1990s and 2000s, income tax had become California's primary funding source for schools and social services. Proposition 13 remains in place, so property tax stays low, and income tax stays high. This trade-off means homeowners benefit from stable property taxes, but workers and investors bear a heavier income tax burden.

California's Spending on Schools and Healthcare Drives Tax Needs

California has the largest public school system in the country, serving roughly 6 million K-12 students. The state also runs one of the largest Medicaid programs (called Medi-Cal), covering over 15 million people. Both programs are funded primarily through state income tax. California also maintains its own court system, highway network, and state parks without relying as heavily on federal funding as smaller states do.

The state's population is also aging, which increases healthcare costs. California's Medicaid program covers not just low-income families but also seniors and people with disabilities, and those costs have grown faster than tax revenue in recent years. To keep these programs funded without cutting services, the state has kept income tax rates high.

How Capital Gains Tax Affects High Earners and Investors

In 2021, California added a new tax on long-term capital gains—profits from selling stocks, real estate, or other investments held for more than a year. The tax is 1% on gains above $250,000 per year for single filers and applies on top of the regular income tax rate. For someone in the top income tax bracket, this means investment profits are taxed at roughly 14.3% combined state and capital gains tax.

This tax was designed to raise revenue from wealthy investors and tech workers who earn most of their income through stock options and company sales rather than wages. It has generated billions in revenue but also prompted some high-earning residents to move to states with no capital gains tax, like Nevada or Texas. The tax is scheduled to expire in 2033 unless voters extend it.

The Cost of Living and Tax Burden Together

California's high income tax combines with high housing costs, high sales tax (averaging 8.6% statewide), and high gas prices to create a total tax and cost-of-living burden that exceeds most other states. A family earning $100,000 in California pays roughly $8,000 to $9,000 in state income tax alone, plus sales tax on purchases and property tax if they own a home. The same family in Texas pays zero state income tax but may pay higher property tax depending on the county.

For middle-income earners, the combination of high income tax and high housing costs makes California one of the most expensive states to live in. High earners often have the option to relocate to lower-tax states, which is why some tech executives and wealthy retirees have moved to Nevada, Texas, or Florida in recent years. Lower-income residents have fewer options to relocate and bear the full weight of the income tax burden.

Why the State Has Not Lowered Income Tax Rates

Lowering California's income tax would require either cutting spending on schools and healthcare or finding new revenue sources. The state has tried both approaches at different times. In the 1990s and 2000s, California cut education spending during recessions, which led to larger class sizes and reduced services. In recent years, the state has raised taxes on corporations and high earners instead of cutting programs.

Politically, there is no consensus on whether to lower income tax. Some voters and lawmakers argue that high earners should pay more to fund public services. Others argue that high taxes drive businesses and wealthy residents out of the state and slow economic growth. Ballot measures to lower income tax have failed in recent elections, while measures to raise taxes on the wealthy have passed. This reflects the state's current political lean toward funding public services through progressive taxation.

Frequently Asked Questions

Does California tax out-of-state income?

California taxes income earned by residents, regardless of where the work was performed. If you live in California and work remotely for a company in another state, you owe California income tax on that salary. However, if you are a nonresident who earned income in California, you owe tax only on the California-source income, not on income earned elsewhere.

Can I deduct federal taxes from my California state taxes?

No. California does not allow a deduction for federal income taxes paid. This is called "double taxation" by critics, though it is legal. Some states do allow this deduction, which lowers the effective state tax rate. California does not, which increases the total tax burden on high earners.

What is the sales tax rate in California?

California's statewide sales tax is 7.25%, but most counties add a local sales tax, bringing the total to between 7.25% and 10.75% depending on location. This is higher than the national average and adds to the overall tax burden, especially for lower-income households that spend a larger percentage of their income on taxable goods.

Do seniors get a break on California income tax?

California does not offer a blanket income tax break for seniors based on age alone. However, seniors may be able to exclude some retirement income, such as Social Security or certain pension income, depending on their total income and filing status. You should consult a tax professional to determine what exclusions you may be may have access to to.

Is California's income tax expected to change soon?

California's tax code changes frequently through ballot measures and legislative action. The capital gains tax is set to expire in 2033 unless extended. Other proposals to raise or lower income tax rates appear on ballots periodically, but no major changes are scheduled for the near term. Tax policy in California is decided by voters and the legislature, not by the governor alone.