State Tax Primer from A to W: California

Welcome to my fifth in a series on state taxes! For information about what I’m trying to do, read my introductory bit. Next on the agenda, the state that we’ve all heard a lot about this year when it comes to taxes: California!

CALIFORNIA

Population: 36,756,666 (1st)

Capital: Sacramento

Largest City: Los Angeles

Gross Domestic Product: $1.812 trillion

GDP per capita: $38,956 (11th)

2008 election winner: Barack Obama

web site: http://www.ca.gov/

Income Tax

California does collect personal income tax. Taxes are fixed according to a series of six brackets (like Arkansas!), depending on net income. In 2008, the lowest tax rate was 1%, with increases to 2%, 4%, 6%, 8% and the highest rate at 9.3%. California also assesses a 1% surcharge on taxable incomes of $1 million or more, which effectively raises the top tax bracket to 10.3% – the surcharge is referred to as the Mental Health Services Tax.

California residents must file an income tax return if either their gross income or their adjusted gross income (AGI) is more than the amount defined by law. California residents must consider their total worldwide gross income to determine their filing requirement (yeah, you kind of get the feeling that bit is there to keep those Hollywood folks from stashing their cash elsewhere to avoid taxation).

California residents are generally taxed on the same income that they report for federal income tax purposes. In fact, California AGI is defined as federal adjusted gross income from all sources reduced or increased by all California income adjustments.

The failure of Proposition 8 during the last election appeared to complicate filing for gay and lesbian couples. Same sex marriages performed in California between June 16, 2008 and November 5, 2008 will be treated as valid marriages for California tax purposes. However, Proposition 8 passed on November 4, 2009, and provided that “only marriage between a man and a woman is valid or recognized in California.” Since California had enacted SB 1827 as law in prior years, couples who are considered registered domestic partners may use the RDP/married status; this does not affect filing status for federal purposes.

Just to make it even more complicated, California is one of nine community property states.

Social Security and Railroad Retirement benefits are exempt from taxation and a 2.5% tax applies to early distributions and qualified pensions. All pensions are fully taxed.

California does participate in the Treasury Set Off program. A California state tax refund will be taken to satisfy any outstanding liabilities owed to California or to the Internal Revenue Service; a federal refund will be taken for same.

Sales Tax.

California imposes a state tax of 7.25%. The total tax rate may be higher than 8.25% depending on the district and local taxes that apply.

Sales tax is imposed on most retail goods and some services. Some items are exempt from sales tax, including:

  • Sales of certain food products for human consumption (many groceries)
  • Sales to the U.S. Government
  • Sales of prescription medicine and certain medical devices
  • Sales of items paid for with food stamps

Tobacco Tax

California’s cigarette tax is 87 cents per pack pack, currently the 31st highest in the country. There is a proposal – being met with much resistance – to raise the tax on cigarettes by $1.50 in 2009, to $2.37 per pack. The national average now stands at $1.20.

Tobacco products, which include all forms of cigars, smoking tobacco, chewing tobacco, and snuff, as well as other products containing at least 50% tobacco, not including cigarettes, are subject only to the cigarette and tobacco products surtax. That rate is currently 45.13%.

In California, the cigarette excise tax revenue is used to fund tobacco control programs.

Gas Tax

The gas tax rate in California is $.455 per gallon. It is the highest rate in the country.

Property Taxes

California does impose taxes on real property based on the assessed value of the property. Property tax bills show land and improvement values. Improvements include all assessable buildings and structures on the land.

The maximum amount of tax on real estate is limited to 1% of the full cash value. Some exemptions apply.

Prior to 1912, California derived up to 70% of its revenue from property taxes. The state no longer relies on property taxes as its primary source of funds, though it collects $33 billion in property taxes per year.

Inheritance and Estate Tax

California does not impose an inheritance tax or a gift tax. Like most states, California no longer has an estate tax since it was tied to the federal estate tax state death tax credit.

Overall Tax Burden

The overall tax burden in California, taking into account taxes paid by individuals, results in a ranking as 6th most-tax burdened state in the country, according to Tax Foundation. This is a couple of steps down from its 4th place status in 2007.

taxgirl says

If the tax burden in California as a whole seems high, take a look at this statistic: in 2004, the richest 3% of state taxpayers paid approximately 60% of all state taxes. And while you’re probably thinking Hollywood dollars, you might be surprised to learn that a relatively high percentage of the tax revenue in years past has come from capital gains taxes. Capital gains taxes, you say? Don’t forget that a disproportionately high number of tech companies are located in California. And those tech companies tend to offer stock options as compensation, not only to execs but to regular employees. In 2005, for example, 14 of Google’s top executives and directors sold $4.4 billion worth of stock last year, according to Thomson Financial. Billions. From 14 people. Who cares about Steve Martin and Gwen Stefani when you have Sergey Brin and Larry Page?

Governor Arnold Schwarzenegger (Republican) has preached fiscal responsibility but is still planning to raise some taxes to fill a gaping hole in the state budget. Even with a high tax rate, California depends on the feds for extra funding – but not as much as other states. In 2005, California citizens received approximately $.78 of federal spending for every $1.00 paid to the Treasury, putting them near the bottom of the list (43rd).

But they’re getting more… So far, more American Recovery and Reinvestment Act (Recovery Act) dollars have been awarded to California than any other state: nearly $13.5 billion. The second state in line received $4 billion less. With deficits looming, Schwarzenegger has made no secret of the fact that his state will take money that other governors may pass on.

The fact that California is struggling in a more visible way than many other states shows you how terribly reliant the state is on its own tax system. With a heavy emphasis on tech companies and the entertainment industry for a resident tax base, the state has been acutely affected by the slowdown in the economy. In particular, property tax revenues have taken a steep dive as foreclosures increased. In years past, housing prices had skyrocketed, temporarily boosting revenues (remember that assessments affect the tax due). However, the incredibly high cost of living took a toll: the ratio of housing costs to income was calculated at three times higher in California than in the rest of the country. When the “bubble” burst, it burst hard: in the first 3 months of 2009, California reported more foreclosures than any other state.

As revenues climbed, California’s expenses have increased. Many conservatives blame the increased expenses on the number of immigrants crossing into California: One in four Californians is an immigrant, a higher proportion than any other state (note the link is a pdf). Most California immigrants are from Mexico – Mexican immigrants to California outpace the next nearest country (Philippines) by a factor of 6. Note that these are all total immigration figures and not numbers of illegal immigrants.

Health care and education comprise the largest percentage of expenses in the 2008-2009 California state budget (note the link is a pdf). Next, with an increase of more than 50% from last year, are business, transportation and housing.

Critics of the Governor’s proposed budget note that the state is increasingly relying on the top taxpayers to pay for the lion’s share of expenses. When you include welfare spending and the like, California ranks 47th of 50 in economic freedom, according to a study by the Pacific Research Institute (PRI) – up a couple of ranks from the prior years.

With the changes in the budget, it’s back in line with the 2005-06 fiscal year, but that was at the height of the housing bubble. With the state’s dollars buying less than before, it will be interesting to see what’s in store for the Golden State. More budger cuts are certain… More taxes, too?

(Note: tax rates were current as of 04-20-2009 and were taken from the CA Board of Equalization)

Comments

  1. Mary Kay Foss

    The sales tax rate went up to 8.25% statewide April 1, 2009. The rate where I live (San Francisco Bay area) is 9.25% – some areas pay more.

  2. Robert

    Yes…and it’s only “temporary”…that is until they raise it higher…

  3. Emcee

    Auto Registration fees also went up 200% recently.

  4. Lois Freeman

    Yes, it is bad. It is time to leave this state. You can probably buy another
    house in another state and make the payments on the taxes you are paying for property taxes and other incendiary taxes. Time to pack up and leave.

    Lois

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  9. Danny McCauley

    Are sales taxes exempt for wheelchair vans with a prescription?

  10. Marsha

    After last nights Gubernatorial debate, I was wondering why Meg Whitman wanted to eliminate Capital gains taxes? Quote from article: “…a disproportionately high number of tech companies are located in California. And those tech companies tend to offer stock options as compensation, not only to execs but to regular employees. In 2005, for example, 14 of Google’s top executives and directors sold $4.4 billion worth of stock last year, according to Thomson Financial. Billions. From 14 people.” She and her cronies have some stock they’d like to unload and don’t want to pay taxes. It’s all becoming clearer now.

  11. Adrian

    My ex wife and i both claimed our 2 children on our earned income credits. I have no contact with our children, and havent in 5 years; however our divorce settlement states that I am the one who claims them. Now a levy has been filed. How can I resolve this

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