Introduction
California’s economy is the largest in the nation, but it also comes with one of the highest state tax burdens. From income to sales and property taxes, residents and businesses often ask: Why are taxes so high in California? This blog explains the structural reasons, what you pay in 2025, and how to plan around it.
Overview of California’s Tax System
Applicable Code:
- California Revenue & Taxation Code §17041 (personal income)
- §23151 (corporate income)
- §6051 (sales tax)
- §110.1 (property tax – Prop 13)
California funds a large portion of its budget through income taxes, with additional revenue from sales, property, and excise taxes.
Top Reasons Behind High California Taxes
- Progressive income tax system with top rate of 13.3 percent
- High housing values, leading to higher property tax bills (even with Prop 13 protections)
- Sales tax rates among the highest in the U.S.
- Heavy reliance on high earners and capital gains
- Ambitious spending on infrastructure, education, public health, and social services
- Local cities and counties may add their own surtaxes and assessments
Breakdown of Key California Taxes in 2025
| Tax Type | Rate/Details |
|---|---|
| Personal Income Tax | 1% – 13.3%, 10 brackets, applies to all income types |
| Corporate Tax | 8.84% for C Corporations, 1.5% for S Corporations |
| Franchise Tax (LLCs) | $800 minimum + gross receipts fee |
| Sales Tax | 7.25% base, up to 10.75% with local add-ons |
| Property Tax | 1% base, capped under Prop 13, plus local bonds |
| Gasoline Excise Tax | 51.1 cents per gallon in 2025 |
Income Brackets and Progressive Rates
California has 10 tax brackets for individuals in 2025. The top 13.3 percent rate applies to:
- Single filers with taxable income over $1 million
- Married filing jointly over $2 million
All income, including capital gains, dividends, self-employment, and real estate sales, is taxed as ordinary income with no preferential capital gains rate.
Tax Impact on Individuals and Businesses
Individuals:
- High income taxes on wages, freelance income, investments
- No deduction for federal taxes paid
- High cost of living indirectly increases taxable income (less ability to deduct)
Businesses:
- Mandatory $800 franchise tax even for zero-revenue entities
- Additional gross receipts fee for LLCs
- S Corps pay 1.5% income tax
- Corporations face 8.84% tax, among the highest in the nation
Many startups and founders reincorporate in lower-tax states like Texas, Nevada, or Wyoming for relief.
Step-by-Step Guide to Manage California Tax Exposure
Step 1: Understand your filing status and income sources (wages, investments, business)
Step 2: Track deductions and credits (retirement, property tax, renters credit)
Step 3: Review entity structure—consider S Corp election or out-of-state incorporation
Step 4: Plan capital asset sales to reduce year-end tax spikes
Step 5: Work with a CPA to explore legal strategies like multi-state planning, timing of income, and retirement contributions
Conclusion
California’s taxes are high due to its progressive income tax system, large public programs, and rising real estate values. But with smart tax planning, it’s possible to reduce your effective rate, preserve wealth, and remain compliant with state law in 2025.
Call to Action
Overwhelmed by California’s tax structure or thinking about relocating or restructuring your business?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent who helps individuals and businesses reduce state tax burdens through strategic planning.
Schedule here: https://calendly.com/anshulcpa
FAQs – California’s High Taxes
Q1: Why are California’s taxes so high compared to other states?
California funds ambitious public services and infrastructure through progressive income and consumption-based taxes.
Q2: Is there a way to avoid the $800 franchise tax?
Only by not registering or operating your business in California. All registered entities owe this annual tax.
Q3: Are capital gains taxed at lower rates in California?
No. All capital gains are taxed at ordinary income rates.
Q4: What’s the sales tax rate in my city?
It varies. The base rate is 7.25%, but with local add-ons, some cities exceed 10%.
Q5: Can I deduct my federal tax on my California return?
No. California does not allow a deduction for federal income tax paid.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant. With over 15 years of experience, he helps California residents, business owners, and out-of-state founders reduce tax exposure, manage compliance, and strategically grow across borders.
Disclaimer
This blog is for educational purposes only and does not constitute legal or tax advice. California tax laws are complex and may change. Consult a licensed CPA before taking tax-related actions or restructuring your business.