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Too Expensive in Living in California?

Compare Texas Vs California State Income Tax Rates/Payroll Tax Rates/Property Tax Rates/Sales Tax Rates  

Compared by Ying McKee, A California Virtual Accountant  

Tax rules can be quite different across state lines, so it's tricky to compare state by state. Overall New York, New Jersey, Connecticut and of course, California has the highest level of state income taxes while Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming change no state income tax at all. Let's not forget about other taxes such as property taxes, sales taxes, etc.


Let's do some fact check. Recently, I compared the tax burden of people living in California vs. Texas: 


State Income tax rates



California Franchise Tax Board are responsible for collecting personal and corporate income tax of California. The top tier personal income tax bracket is 13.3 percent for any California taxable income over 1 million a year(married filed jointly). Combined with federal income taxes, high-income earners living in the State of California can face the top marginal tax rate of over 50%! Of course, only about 60,000 households in California are paying this rate. California Corporate tax rate is at 8.84% flat rate.


Texas has no personal income taxes. For business tax, Texas joined Ohio, Kentucky and New Jersey in 2006 to charge franchise

tax based on gross receipts(modified) at around 1% average.


Employment Taxes


Payroll taxes are a significant factor to consider too.  California has one of the highest state unemployment tax rate with minimum UI tax rate from 1.5%   vs. Texas at 0.45%. California also imposes employment training tax with current ETT rate at 0.1 %, State disability insurance tax(SDI) at 0.9%. Texas has no ETT and no SDI tax at all. 


Sales Taxes


California has the highest state sales tax rate: 7.25% Adding local and city taxes, the combined rate can reach up to 10% in some parts of Los Angeles County.


The Texas state sales and use tax rate is 6.25%. Adding city, county tax up to 2% for maximum about 8.25%



Property Taxes


California's average effective property tax rate is actually among the lowest comparing to other states: at 0.72%.  Adding additional parcel taxes and fees, it can reach around 1%. However, Average housing price in California is approximately $ 450,000. Therefore, average property taxes paid on the house is up to $4,500/ year.


Texas' property tax rate is at 1.9 %. However, with average housing price in Texas only around $146,000, average property taxes paid on the house is less than $2,800.




What to do living in California?

Since Wisconsin first started to levy state taxes in 1911, state tax system has to become increasingly complex. They tend to mirror federal tax system but has diverged significantly.  


California not only has one of the most progress tax rates for individual, but it's also non-conformity to federal tax law adds to the complexity. For example, capital gains are taxed as the ordinary income instead of lower long-term capital gain tax treatment for federal income tax purpose. California is notoriously aggressive in their tax compliance and tax collection. FTB also audits returns that IRS never even bothered. (Read my article "Odds of being audited" and also "Should I ignore IRS/FTB notices?"



Taxpayers have to continually deal with any differences between state and federal tax provisions. Same complexity problems lie with corporate taxes, property taxes, and sales/use taxes as well.  Most taxpayers do not understand the imposition of the tax. The three most important resources for Californian Taxpayers are Franchise Tax Board, Employment Development Department and Board of Equalization and of course, your California Virtual Accountant-Virtual CPA For You.





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Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

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