Texas Taxes Lower Than California’s? Not So Fast! Here’s How States Compare

For quite some time now, Texas politicians have been taking jabs at California, claiming that their state is somehow a better place to live and locate a business due to lower Texan taxes, and other supposed benefits. Tech companies, in particular, have been reportedly fleeing California for the Lone Star State, led by Elon Musk taking the headquarters of his electric car-maker Tesla from Palo Alto to the Texas capital of Austin.

But a new research report by the financial site WalletHub contradicts that popular tax-exodus narrative. In fact, the study finds, when the total tax burden levied by each state is taken into account, Texans pay a higher percentage of their incomes in taxes than Californians do—quite an accomplishment considering that Texas has no personal income tax.

The cash to keep the state operating has to come from somewhere, so Texas makes up what it misses by not collecting income tax by slamming its residents with relatively high property and consumption taxes.

California charges its residents income tax under a progressive tax system, meaning that the tax rate rises with the amount of personal income earned by a taxpayer. Rates range across nine brackets, from one percent for the lowest income-earners to a top rate of 12.3 percent on personal incomes of $677,276 or higher. Taxpayers who pull in more than $1 million pay a surcharge of one percent on top of that highest rate.

As a result, California pulls in 69 percent of its general fund revenues from personal income taxes, and just 16.2 percent from sales and use taxes. Texas on the other hand takes in 55.7 percent of its revenues from sales and use levies. 

Those revenues go to fund the functioning of the state government, the services it provides and various agencies it operates. But local and county governments also need funding, and plenty of it, to provide their own services, which range from schools to public parks to repairing potholes and numerous other essential functions. That money comes from property taxes—another significant area of difference between California and Texas.

Property Taxes Make the Difference

Unlike income tax, which is paid by anyone who has a job, property taxes are paid only by residents who own real estate—homes, business structures or undeveloped open land.  California also collects a one percent tax on “personal property,” which is property owned by a business, excluding inventory, but including tools, machinery and furniture. Some high value items owned by individuals—boats, private airplanes, fancy jewelry and so on—are also subject to personal property tax, sometimes referred to as “luxury tax.”

Real property tax is what local governments collect, and what provides an indispensable chunk of their funding. In 2019, across the United States, local governments collected $559 billion in property taxes, according to the nonprofit research group Urban Institute. (Another $21 billion in assessed taxes go unpaid by property owners every year, according to the National Tax Lien Association.)

Property taxes go to fund, and are collected by, municipal and county governments—but also districts that serve a specific purpose, such as school districts, fire districts, and a wide range of special districts.   

What’s the Disparity Between California and Texas Taxes?

Thanks in large part to Proposition 13, the 1978 ballot measure that caps local property tax rates and limits future increases, California taxpayers enjoy the 16th-lowest overall property tax obligation of the 50 states. 

Texans, on the other hand, must shoulder the fifth-highest property tax load in the country, according to a survey by WalletHub. California’s effective overall property tax rate is just 0.75 percent. The Texas rate is neatly a full percentage point higher—1.74 percent.

The difference in property taxes is one of the most important factors in giving Texas an effective overall tax rate of 12.73 percent compared to the somewhat more tolerable 8.97 percent in California.

There is one group of taxpayers who have an easier time of it in Texas—very rich people. 

High six-figure earners in Texas—that is, those who rake in at least $617,900 per year, the top one percent of earners in that state—pay a relatively minuscule 3.1 percent of their income in taxes, according to the Institute of Taxation and Economic Policy (ITEP). The top one percent in California make somewhat more, $714,400, but pay a whole lot more—a whopping 12.4 percent.

On the other hand, according to ITEP, California is much friendlier to low-income taxpayers. The bottom 20 percent of California earners (under $23,200) pay 10.5 percent in taxes compared to 13 percent for the same segment (earners under $20,900) in Texas. Middle-income taxpayers make out even better in California than their poorer counterparts. Those bringing in between $39,100 and $62,300 pay only 8.9 percent. In Texas the middle-income segment, those earning between $35,800 and $56,000, pay 9.7 percent in state and local taxes.

The disparity between the tax burdens shouldered by rich Texans and taxpayers there in the middle and low income brackets earned Texas the dubious distinction of being the second-most regressive tax state—the term "regressive" referring to a system that puts a heavier burden on lower income earners than on those with high incomes. Only Washington has a less equitable tax system. 

A progressive tax system works in exactly the opposite way. According to ITEP's crietria, California has the most progressive tax policies in the country. In fact, California is one of only five states, plus the District of Columbia, that can boast a progressive tax system at all. All 45 other states place higher tax burdens on lower and middle income earners than on the wealthy.