LEGISLATIVE ANALYST’S OFFICE
CALIFORNIA’S TAX SYSTEM
California’s state and local governments rely on three main taxes. The personal
income tax is the state’s main revenue source, the property tax is the major
local tax, and the state and local governments both receive revenue from the
sales and use tax. In addition, many smaller taxes raise revenue for state and
local government operations. In 2015-16, taxes in California raised a total of
$220 billion—equal to nearly 10 percent of the state economy.
The chart to the right summarizes this tax system. The inner black pie chart shows
that roughly two-thirds of tax revenues in California go to the state government
with the other one-third collected by local governments. The middle ring shows
each tax as a share of the whole system. (Note that the line from the inner black
pie chart intersects with the sales and use tax segment to show the shares of
sales tax revenue that go to the state and to local governments.) The outer ring
breaks out each major tax by source. For example, the biggest source of personal
income tax revenue is wage and salary income.
In addition to taxes, the state and local governments rely on federal funds, fees,
and other sources of revenue to fund government operations. This publication,
however, focuses solely on taxes levied in California.
INTRODUCTION
2
LAO California’s Tax System | Overview
OVERVIEW OF CALIFORNIA’S TAX SYSTEM
3
LAO California’s Tax System | Overview
Wages and Salaries
Retirement Income
Dividends,
Interest, and Rent
Business Income
Capital Gains
Other
Corporations
Gasoline,
Diesel, and Other
Motor Vehicle
and Parts Dealers
Furniture, Home Furnishings, Electronics, and Appliance
Building Materials and Garden Supplies
Food and Beverage Stores
Gasoline Stations
Clothing and Accessories Stores
General
Merchandise Stores
Bars and
Restaurants
Other Retailers
Construction and Re
al Estate
Manufacturing
Wholesalers
Other Non-Retail
Businesses
Other
Commercial/Industrial
Residential Not
Owner-Occupied
Payroll
Property Transfer
Business
Utilities
Hotels
Vehicle License Fee
Tobacco Taxes
Insurance Tax
Personal
Income Tax
Corporation Tax
Fuel Taxes
Other State Taxes
Sales and
Use Tax
Other Local Taxes
Property Tax
State
Local
Residential
Owner-Occupied
Alcoholic Beverage Tax
Other Entities
2015-16
4
LAO California’s Tax System | Personal Income Tax (PIT)
1
CHAPTER
5
LAO California’s Tax System | Personal Income Tax (PIT)
The personal income tax (PIT) is a broad-based tax
that the state levies on most types of income, such
as wages and capital gains. The PIT is an important
revenue source for the state government, generating
over two-thirds of the revenue for the General Fund—
the state’s main operating account. In recent years,
the PIT has generated more revenue than any other
tax in California’s tax system.
PERSONAL
INCOME TAX
6
LAO California’s Tax System | Personal Income Tax (PIT)
ABOUT TWO-THIRDS OF INCOME
COMES FROM WAGES AND SALARIES
Business
Income
(Sole Owner)
$53 Billion
Dividends,
Interest,
and Rent
$56 Billion
Business
Income
(Multiple
Owners)
$88 Billion
Pensions,
Annuities,
and IRA
Distributions
$102 Billion
Capital Gains
$118 Billion
Wages and Salaries
$898 Billion
Personal income tax rates are marginal, meaning that higher income increments are taxed at
higher rates. For example, a single filer with taxable income of $300,000 is taxed at 1 percent on
the first $8,000 of their income, but 10.3 percent on the last $31,000 of their income. A taxpayer’s
highest marginal rate is higher than their effective rate (the average rate at which their income is
taxed). For example, a single filer with $100,000 in taxable income is taxed at 9.3 percent on their
last dollar of income but their effective tax rate (before tax credits) is 6.7 percent.
2015
Marginal Rate
Effective Rate
2
4
6
8
10
12
14%
100,000 200,000 300,000 400,000 500,000 600,000 700,000 $800,000
Marginal
Rate
1%
2%
4%
6%
Income
Between
$0K - $8K
$8K - $19K
$19K - $30K
$30K - $42K
8% $42K - $53K
9.3%
10.3%
11.3%
12.3%
$53K - $269K
$269K - $322K
$322K - $537K
$537K - $1M
13.3% $1M and Over
HOW DO PIT RATES WORK?
Marginal and Effective Tax Rates, Single Filer, 2017
7
LAO California’s Tax System | Personal Income Tax (PIT)
Do itemized
deductions exceed
$8,472 standard
deduction?
Step 1 Add up Income
$60K in Wages
$30K in Business Income
$90K
Adjusted Gross Income
Step 2 Add up Deductions
$8K in Mortgage Interest
$5K in Local Property Taxes
$2K in Student Loan Interest
$15K Itemized Deductions
Step 3
Calculate Taxable Income
$90K Adjusted Gross Income
$15K Itemized Deductions
$75K Taxable Income
Step 4
Apply Tax Rates in Table Above
First $16K Taxed at 1% = $164
Next $23K Taxed at 2% = $451
Next $23K Taxed at 4% = $902
Next $23K Taxed at 6% = $808
Tax Liability Before Credits $2,325
Step 5 Add up Tax Credits
$400 Child Care Tax Credit
$114 X 2
Personal Exemption Credit
$353 Dependent Exemption Credit
$981 Total Tax Credits
Step 6 Calculate Tax Liability
Tax Liability Before Credits $2,325
Minus Credits -$981
Final Tax Bill = $1,344
Yes: take
itemized
No: take
standard
25
50
75
100%
0-50K 50K-100K 100K-200K 200K-500K 500K-1M 1M-5M Over $5M
Standard Itemized
Filers Itemizing Deductions Tend to Be Higher-Income Taxpayers
Almost two-thirds of all filers take the standard deduction
Marignal
Rate
1%
2%
4%
6%
Income
Between
$0-$16K
$16K-$39K
$39K-$62K
$62K-$85K
CALCULATING THE
PERSONAL INCOME TAX BILL
Married Couple With One Dependent Filing Jointly, 2017
8
LAO California’s Tax System | Personal Income Tax (PIT)
BREAKDOWN OF DEDUCTIONS
In Billions, 2015
PIT deductions reduce taxpayers’ taxable incomes. In total, deductions reduced taxable income
by about $200 billion in 2015. About $7 billion of the deductions shown here went unused because
itemized deductions are phased out for high-income taxpayers.
$60.7
$52.9
$4.3
$30.1
$20.4
$10.6
Standard
Deduction
Mortgage
Interest
Property
Taxes
Business and
Other Expenses
Medical
Expenses
Other
$30.0
Charitable
Contributions
25
50%
$0K - $20K
$20K - $50K
$50K - $100K
$100K - $200K
$200K - $500K
$500K - $1M
$1M and Over
Standard Deduction
Medical Expenses
Mortgage Interest
Property Taxes
Charitable Contributions
Business and Other Expenses
WHO USES DEDUCTIONS?
Share of Deduction Value by Income Group, 2015
9
LAO California’s Tax System | Personal Income Tax (PIT)
BREAKDOWN OF CREDITS
In Billions, 2015
$4.0
$2.3
$0.4
$0.3
$0.2
$0.1
$1.1
Dependent Credit
Personal Credit
Blind and Senior
Credit
Enterprise Zones
EITC
Renter's Credit
Other
WHO USES CREDITS?
25
50%
Dependent Credit Personal Credit
Blind and Senior Credit
Renter’s Credit
EITC
Enterprise Zones
100
66
55
$0K - $20K
$20K - $50K
$50K - $100K
$100K - $200K
$200K - $500K
$500K - $1M
$1M and over
PIT credits reduce tax liabilities dollar for dollar, resulting in a dollar-for-dollar reduction in state
revenue. With the exception of the Earned Income Tax Credit (EITC), credits cannot reduce a
taxpayer’s liability below zero. For this reason, the amount of credits shown in the chart is about
double the amount of credits actually used by taxpayers to reduce liability.
Share of Credit Value by Income Group, 2015
10
LAO California’s Tax System | Personal Income Tax (PIT)
PIT LIABILITY CONCENTRATED AMONG TOP EARNERS
Tax Statistics by Income Group, 2015
$0 to $20K
$20K to $50K
$50K to $100K
$100K to $200K
$200K to $300K
$300K to $500K
$500K to $1M
Over $1M
27.7%
31.0%
21.2%
12.9%
3.2%
1.7%
0.8%
0.4%
3.7%
13.0%
19.1%
22.4%
9.8%
8.3%
6.9%
19.4%
0.1%
2.0%
8.6%
18.0%
10.7%
10.6%
10.3%
39.6%
Share of Tax Returns Share of Adjusted Gross Income Share of Tax Liability
$1M
to 2M
$2M
to 3M
$3M
to 4M
$4M
to 5M
Over
$5M
Over Half of PIT Liability for Over $1 Million Group
Paid by Filers With Adjusted Gross Income Over $5 Million
21% 10% 7% 5% 57%
11
LAO California’s Tax System | Personal Income Tax (PIT)
INCOME MAKEUP DIFFERENT
FOR LOW- AND HIGH-INCOME TAXPAYERS
2015
The graphic below shows how taxpayers in different income groups derive their income. Some types of
income, including wages and salaries and retirement income (pensions, annuities, and IRA distributions)
make up the majority of low- and middle-income taxpayers’ incomes. These sources, however, account
for a minority of the total incomes of the highest-income taxpayers, whose incomes are derived mostly
from capital gains, partnership income, and dividends, interest, and rent. (All other income—mostly
proprietors’ income—is shown in grey.)
25
50
75
100%
0-40K 40K-70K 70K-100K 100K-150K 150K-200K 200K-300K 300K-400K 400K-500K 500K-1M 1M-2M 2M-3M 3M-4M 4M-5M Over $5M
HIGH-INCOME TAXPAYERS RELY
MORE ON VOLATILE INCOME SOURCES
Total Percent Change, 2015 Dollars
50
100
150
200
250%
1996 2001 2006 2011
-50
Wages and Salaries
Capital Gains
Partnership
Income
Dividends, Interest, and Rent
Retirement Income
2015
50
100
150
200
250%
1996 2001 2006 2011
-50
2015
12
LAO California’s Tax System | Personal Income Tax (PIT)
CAUSES OF PIT VOLATILITY
Average Deviation, 1990 to 2014
Average deviation (AD) is a measure of revenue volatility. With an AD of 12.2, the PIT is over five times more
volatile than personal income (2.3). About 40% of the higher volatility is due to the state’s choices about
which types of income to tax. Another 40% is due to taxing higher income at higher rates. The last 20%
comes from PIT credits and deductions, which mostly reduce the relatively stable part of the tax base.
PIT MORE VOLATILE THAN PERSONAL INCOME
Annual Percent Change
-30
-20
-10
10
20
30
40%
1997 2002 2007 2012
Personal Income Tax
Personal Income
5
10
15
Volatility of
Personal Income
Definition of
PIT Base
Graduated
Rate Structure
Credits
and Deductions
Volatility of PIT
As the state’s main revenue source, the highly volatile PIT results in revenue uncertainty, thus complicating
state budgeting. (Personal income is an overall measure of the economy that includes individuals’ wages,
business income, and various other types of income, but that excludes capital gains income.)
13
LAO California’s Tax System | Personal Income Tax (PIT)
WITH VOLATILITY COMES GREATER REVENUE GROWTH
Bulk of Income Growth Has Gone to High-Income Taxpayers...
Adjusted Gross Income Per Return by Income Range, Total Percent Change, 2015 Dollars
The top 1% of taxpayers typically pay between 40% and 50% of the PIT. Their incomes are highly volatile,
which has contributed to PIT volatility. On the other hand, their incomes also have grown more than any other
group of taxpayers. This has contributed to PIT growth.
...Which Has Contributed to PIT Revenues Growing Much Faster Than Revenues
From Other State Taxes
Total Percent Change, 2015-16 Dollars
95
th
to 99
th
90
th
to 95
th
-25
25
50
75
100
125%
1996 2001 2006 2011
Top 1 Percentile
Bottom Four Quintiles
80
th
to 90
th
2015
-25
25
50
75
100
125
150%
1996-97 2001-02 2006-07 2011-12
Personal Income Tax
Sales and Use Tax
Corporation Tax
2015-16
14
LAO California’s Tax System | Personal Income Tax (PIT)
VOLATILITY OF THE PIT BASE
State law specifies which types of income are subject to the
personal income tax. In general, California has chosen to tax
relatively volatile types of income, as illustrated by the chart
on the next page. The boxes are shaded by their volatility
measure (average deviation). An item with a measure of 6 is
twice as volatile as an item with a measure of 3.
Personal income is an economic statistic that includes most
types of income. Different portions of personal income are
subject to tax. Some portions of personal income are more
volatile than others. For example, the portion of dividends,
interest, and rent flowing to the PIT base is more volatile
(darker) than the portion not in the PIT base. California
also chooses to tax some types of income not included in
personal income. In particular, capital gains income, with a
volatility measure of 35, is more than twice as volatile as any
other part of the PIT base. Overall, the PIT base is almost
three times as volatile as personal income.
15
LAO California’s Tax System | Personal Income Tax (PIT)
PIT BASE MORE VOLATILE THAN PERSONAL INCOME
Average Deviation, 1990-2014
Wages and
Salaries
Dividends,
Interest,
and Rent
Proprietor and
Partnership
Transfer
Payments
Employer-Paid
Benefits
Components of
Personal Income
Pensions and IRA Distributions
Capital Gains
Items Not in
Personal Income
Personal Income
Tax Base
Pensions and IRA Distributions
Capital Gains
Wages and
Salaries
Dividends, Interest, and Rent
Proprietor and Partnership
Items Not
Included in
PIT Base
Wages and Salaries
Dividends, Interest, and Rent
Transfer Payments
Employer-Paid Benefits
Average Deviation
Under 3
3.1 - 6
6.1 - 9
9.1 - 12
Over 12
Proprietor and Partnership
Within these broad categories, some components of personal income are in the
tax base and others are untaxed. For example, interest earned from corporate
bonds is taxed but interest earned from municipal bonds is untaxed.
16
LAO California’s Tax System | Personal Income Tax (PIT)
HIGHER INCOMES CONCENTRATED IN BAY AREA
2013
The graphic below shows how incomes by county compare to the statewide average. A blue shade
indicates that a county has fewer taxpayers in that income range, a yellow shade indicates the county
is near the statewide average, and an orange shade indicates they have more taxpayers in that range.
Compared to the statewide average, Marin county has 4.6 times more taxpayers in the over $1 million
range, the most of any county.
Region County $500K to $1M Over $1M
Alameda
Contra Costa
Marin
Napa
San Benito
San Francisco
San Mateo
Santa Clara
Solano
Sonoma
Los Angeles
Orange
Ventura
San Diego
San Diego
Monterey
San Luis Obispo
Santa Cruz
Santa Barbara
El Dorado
Placer
Sacramento
Yolo
Fresno
Kern
Kings
Madera
Mariposa
Merced
San Joaquin
Stanislaus
Amador
Butte
Calaveras
Colusa
Del Norte
Glenn
Humboldt
Imperial
Inyo
Lake
Lassen
Mendocino
Modoc
Mono
Nevada
Plumas
Shasta
Sierra
Siskiyou
Sutter
Tehama
Trinity
Tulare
Tuolumne
Yuba
Riverside
San Bernardino
Rest of State
Inland
Empire
$300K to $500K
Bay Area
Los
Angeles
Central
Coast
Sacramento
San
Joaquin
Valley
$0 to $15K $15K to $30K $30K to $50K $50K to $80K $80K to $150K $150K to $300K
Legend
12.5 Times Less Frequent
Than Statewide Average
Equal to State Average 4.6 Times More Frequent
Than State Average
17
LAO California’s Tax System | Personal Income Tax (PIT)
Average deviation (AD) is a measure of revenue volatility. With an AD of 16.3, personal income tax paid by Bay
Area residents from 1996-2014 was over 40 percent more volatile than for tax paid statewide (11.4).
2014
BAY AREA CONTRIBUTES DISPROPORTIONATELY TO PIT
Average Deviation, 1996-2014
PIT PAID BY BAY AREA MORE VOLATILE THAN REST OF STATE
10
20
30
40
50%
10 20 30 40 50 60 70 80 90 100%
Percent of Personal Income Tax Paid
Percent of Population
Los Angeles
Sacramento
San
Diego
Central
Coast
San
Joaquin
Valley
Rest
of
State
Inland
Empire
Bay Area
The Bay Area pays nearly 40% of the
PIT but only makes up 20% of population.
By contrast, Los Angeles’ tax paid (34%)
is closer to its share of the population (36%).
500 1,500 2,500 $3,500
Bay Area
Los Angeles
San Diego
Central Coast
Sacramento
Central Valley
Rest of State
Inland Empire
Per Capita Taxes Paid by Region
16.3
12.0
11.4
10.0
9.2
7.5
7.4
7.0
6.9
Bay Area
Central Coast
Statewide
San Diego
Los Angeles
Rest of State
Sacramento
San Joaquin Valley
Inland Empire
2
18
LAO California’s Tax System | Property Tax
CHAPTER
19
LAO California’s Tax System | Property Tax
For many California taxpayers, the property tax bill is one
of the largest tax payments they make each year. For
thousands of California local governments—K–12 schools,
community colleges, cities, counties, and special districts—
revenue from property tax bills represents the foundation
of their budgets. Cities, counties, and special districts use
property tax revenues to support municipal services like
police, fire, and parks. Property tax revenue remains in the
county in which it is raised.
Property taxes are levied by local governments on real
property (principally land and buildings), as well as some
types of personal property, which includes business
property (like manufacturing equipment), aircrafts, and
vessels. Proposition 13 (1978) limits the property tax
on real property to 1 percent of assessed value. Under
Proposition 13, assessed value for real property is limited
to the price paid for the property increased each year by 2
percent or inflation, whichever is lower. In contrast, personal
property is taxed based on its market value. In 2016-17,
statewide property tax revenues were about $60 billion.
PROPERTY TAX
20
LAO California’s Tax System | Property Tax
This figure shows the assessed value of each type of property subject to the property tax.
In most cases, county assessors determine the value of property within the county. For
a subset of property—like natural gas pipelines—the state determines the value of the
property. Statewide, the assessed value of taxable property is over $5.7 trillion.
WHAT IS SUBJECT TO THE PROPERTY TAX?
2016-17
Vacant Land $115 Billion
Single Family Homes
$2.9 Trillion
Commercial
and Industrial
$1.1 Trillion
Multifamily
and Condos
$939 Billion
State Assessed $103 Billion
Agricultural and Rural Land $101 Billion
Oil, Minerals, and Gas $22 Billion
Aircraft $19 Billion
Watercraft $6 Billion
Personal Property $203 Billion
21
LAO California’s Tax System | Property Tax
SAMPLE ANNUAL PROPERTY TAX BILL
Property ID: 1234567
Mailing Address:
Doe, Jane
1234 ABC Street
Sacramento, CA 00000
2016-17 Roll
Land
Improvements
Total
Less Exemptions
Net Assessed Value
Assessed Value
$115,000.00
$242,000.00
$357,000.00
$7,000.00
$350,000.00
Secured Property Tax for Fiscal Year July 1, 2016 to June 30, 2017
Property Owner Information
Property Valuation on Jan 1, 2012
Detail of Taxes Due
Agency
General Tax Levy
Voter-Approved Debt Rates
City
Water District
School District
Community College District
Direct Levies
Sidewalk District Assessment
Flood Control District Assessment
Street Lighting District Assessment
Mello-Roos District
School District Parcel Tax
Total Taxes Due
1st Installment
2nd Installment
Rate
1.0000
0.0201
0.0018
0.1010
0.0102
Amount
$3,500.00
$70.35
6.30
353.50
35.70
$9.36
64.39
12.71
86.51
125.00
$4,263.82
$2,131.91
2,131.91
Taxable Value
Each year, county assessors determine
each property’s assessed value,
which includes the value of both land
and buildings. Assessed value typically
is based on a property’s purchase
price. In the year a property is
purchased, it is taxed at its purchase
price. Each year thereafter, its assessed
value is increased by inflation or
2 percent, whichever is lower. Upon
resale, it is again taxed at its purchase
price. If a property’s market value dips
below its inflation-adjusted purchase
price, it is typically taxed on its market
value instead.
Exemptions
Certain exemptions can reduce
a property’s assessed value. The
most common is the homeowner’s
exemption, which reduces an
owner-occupied home’s assessed
value by $7,000.
Ad Valorem Taxes
Taxes based on the value of
property are known as ad valorem
taxes. Proposition 13 capped the
ad valorem property tax rate at
1 percent plus voter-approved
add-on rates to for certain debt
repayments.
Other Taxes and Charges
Local governments may levy
other charges on property that
are not ad valorem taxes. Often,
these charges are based on
the benefits the propertyowner
receives from the service
or improvement.
Total Payment
County tax collectors divide
properties’ total tax bill into two
payments. The first payment is
due by December 10
th
and
the second payment is due by
April 10
th
. Many homeowners pay
their property taxes as part of their
monthly mortgage and their
mortgage servicer pays the county
on the homeowners’ behalf.
1970: Home Purchased
From 1970 to 1977 the
home is taxed based on
its market value.
1978: Proposition 13
Proposition 13 (1978) requires a
home's assessed value to be based
on its purchase price, increased by
up to 2 percent per year for inflation.
Whenever it is sold, it is again taxed
at its purchase price. Proposition 13
also rolled back assessed values to
their 1975 levels.
1985: Bedroom Added
The addition of a bedroom
increases the home's assessed
value to reflect the added market
value of the bedroom but not that
original home.
1988: Transfer to Child
A property transfer typically
triggers a reassessment. However,
Proposition 58 (1986) allows the
home to transfer from the owner to
the child without a reassessment
to market value.
SOLD
SOLD
2005: Home Sold
The home is sold and
reassessed to market value,
significantly increasing the
tax bill.
2008: Decline in Value
The home's market value dips below
its inflation-adjusted purchase price.
Proposition 8 (1978) allows the
home to be temporarily assessed
based on its market value instead.
2014: Recovery
The home's market value
recovers and it is again
taxed at its inflation-adjusted
purchase price.
Market Value
The price the home could be sold for.
Assessed Value
The basis of the property owner's tax bill.
22
LAO California’s Tax System | Property Tax
This graphic shows the value of a hypothetical
home over time to demonstrate how different
transactions and changes to a property affect a
property owner’s tax bill.
THE LIFE OF A HOUSE
23
LAO California’s Tax System | Property Tax
This map shows the property taxes paid per $100,000 of market value for homes in a Los Angeles zip code
in 2015. Property taxes are based on the assessed value, which typically grows more slowly than market
value. Because of this, significant differences arise among property owners solely because they purchased
their properties at different times.
NEIGHBORS OFTEN FACE DIFFERENT TAX BURDENS
Greater Than $800
$600 to $800
$400 to $600
$200 to $400
Less Than $200
Property Taxes Per $100,000
of Market Value
24
LAO California’s Tax System | Property Tax
TWO FACTORS DRIVE FUNDING FOR MUNICIPAL SERVICES
50,000 100,000 150,000 200,000 250,000 $300,000
Marin
San Mateo
Napa
San Francisco
Inyo
Santa Clara
Plumas
San Luis Obispo
Sierra
Placer
Nevada
Colusa
Santa Barbara
Orange
Contra Costa
Sonoma
El Dorado
Alameda
Santa Cruz
San Diego
Amador
Ventura
Monterey
Calaveras
Los Angeles
Tuolumne
San Benito
Mendocino
Mariposa
Yolo
Modoc
Solano
Trinity
Riverside
Glenn
Siskiyou
Lake
Kern
Sacramento
San Bernardino
Shasta
Sutter
Humboldt
San Joaquin
Butte
Lassen
Madera
Stanislaus
Merced
Tehama
Kings
Fres
no
Yuba
Imperial
Tulare
Del Norte
Assessed Value of Property
Municipal Services Schools
While Contra Costa and Orange have
similar property tax bases, Orange has
less available for municipal services.
Property tax funding for municipal services—
such as police, fire, and parks—generally is
higher in counties with higher assessed values.
Municipal services funding also depends on
the share of property tax revenue allocated to
municipal services relative to schools. While
schools’ shares vary across counties, the state
allocates funding to schools to equalize these
differences.
Per Capita Assessed Value, 2016-17
25
LAO California’s Tax System | Property Tax
REVENUE FOR MUNICIPAL SERVICES VARIES WIDELY
Los Angeles
Ventura
San Diego
San Bernardino
Santa Clara
Alameda
Sacramento
Contra
Costa
Kern
San
Francisco
San
Mateo
Monterey
San
Luis
Obispo
Marin
Yolo
Napa
Calaveras
1,000,000
250,000
50,000
Orange
Riverside
Fresno
San
Joaquin
Tulare
Merced
Butte
Shasta
Kings
Inyo
San Benito
Mono
Mariposa
Alpine
Tuolumne
Amador
Sierra
Plumas
Lassen
Modoc
Siskiyou
Glenn
Colusa
Trinity
Del Norte
Tehama
Nevada
North Counties
Los Angeles Area
San Diego Area
Inland Empire
Central Coast
San Joaquin Valley
Sacramento Area
Bay Area
Imperial
Santa
Cruz
Santa
Barbara
Madera
El Dorado
Placer
Stanislaus
Sonoma
Solano
Sutter
Yuba
Lake
Mendocino
Humoldt
Per-Capita Revenue
Less Than $410
$410 - $520
$520 - $640
$640 - $890
Over $890
Population
This graphic shows the per-person property
taxes available within each county in 2015-16
for counties, cities, and special districts. The
amount of funding available in each county
reflects the level of municipal services that
residents can expect to receive from their local
governments.
26
LAO California’s Tax System | Property Tax
Stable—or predictable—revenues allow governments to provide consistent levels of service. The property tax—
the largest single source of local government revenue—is a stable revenue source compared to the personal
income tax, which is the state’s largest single source of revenue.
PROPERTY TAX MORE STABLE THAN PERSONAL INCOME TAX
Annual Percent Change
Governments ideally rely on revenue sources that grow sufficiently to cover any increases in the costs of
providing services. Some argue that the property tax has not grown sufficiently to cover local government costs
since the passage of Proposition 13 in 1978. Others argue property tax revenues have grown substantially
since 1978. Below, we present two ways of measuring property tax revenue growth.
PROPERTY TAX HAS GROWN SINCE PROPOSITION 13
400
800
1,200
1,600
$2,000
1960 1970 1980 1990 2000 2010
1
2
3
4
5
6
7%
1960 1970 1980 1990 2000 2010
Proposition 13 Proposition 13
Per Person Inflation-Adjusted (2015-16) Dollars As Share of California Economy (Personal Income)
-30
-20
-10
10
20
30%
1980 1985 1990 1995 2000 2005 2010 2015
Personal Income Tax
Property Tax
DETERMINE VEHICLE'S VALUE
In the first year a vehicle is owned, its value is roughly the
purchase price. In subsequent years, this value is
depreciated based on the schedule to the right. For this
example, we assume a four year-old car with an initial
purchase price of $30,100.
The car's value in year four is: $30,100 x 70% = $21,070.
DETERMINE VEHICLE'S VALUE
In the first year a vehicle is owned, its value is roughly the
purchase price. In subsequent years, this value is
depreciated based on the schedule to the right. For this
example, we assume a four year-old car with an initial
purchase price of $30,100.
The car's value in year four is: $30,100 x 70% = $21,070.
START
START
TIF
Transportation
Improvement
Fee
Determine the TIF owed.
Find the fee in the chart to
the right that corresponds
to the vehicle value
($21,070) = $50
Apply the 0.65% VLF rate
$21,070 X 0.65 = $137
VLF
Vehicle
License Fee
Total Tax = $187
STOP
Depreciation Schedule
Years Owned
1
2
3
4
5
6
7
8
9
10
11 and After
Depreciation Rate
100
90
80
70
60
50
40
30
25
20
15
%
TIF Schedule
Value of Vehicle
$0 to $5k
$5k to $25k
$25k to $35k
$35k to $60k
Over $60k
Annual Fee
$25
$50
$100
$150
$175
27
LAO California’s Tax System | Property Tax
California levies a variety of charges on vehicles. Two of the
larger ones—the vehicle license fee (VLF) and the transportation
improvement fee (TIF)—effectively are property taxes on vehicles
(but exempt from Proposition 13). Both taxes are levied on the car’s
depreciated value. Revenue from the VLF ($2.6 billion in 2016-17)
goes to cities and counties for health and human services and law
enforcement programs. Revenue from the TIF ($1.5 billion projected in
2018-19) goes to state and local agencies for transportation programs.
PROPERTY TAXES ON VEHICLES
3
28
LAO California’s Tax System | Sales Tax
CHAPTER
29
LAO California’s Tax System | Sales Tax
California’s state and local governments
levy a tax on retail sales of tangible personal
property. This tax—called the sales and use
tax (hereafter, sales tax)—is a significant
source of state and local revenue. In this
chapter, we draw distinctions between the
products that are subject to this tax and those
that are not. We also provide information on
the variation in tax rates across the state and
the distribution of revenue among state and
local programs.
SALES AND
USE TAX
The sales tax is levied on the retail sale of tangible personal property. (“Tangible” refers to physical materials. “Personal
property” is movable from one place to another.) The graphic below compares the amount of taxable sales (spending
on items subject to the sales tax) in 2015 with the amount of taxable sales that would be subject to the tax if not for
exemptions. The icons show major categories of taxable sales and exemptions.
WHAT THE SALES TAX IS
Households and businesses spend money on many services and other items that are not subject to the sales tax,
generally because those items are not tangible personal property. Instead, these items are services (such as a hair
cut), intangible property (such as an e-book), and real property (such as land). For example, a consumer having their
car repaired would pay sales tax on parts like brake pads but would not pay sales tax on the labor associated with the
repair. Spending on these items is several times the size of the sales tax base.
WHAT THE SALES TAX IS NOT
30
LAO California’s Tax System | Sales Tax
Items Not Subject to Sales Tax
Clothing Furniture Vehicles
Personal Care Products Office Supplies Appliances Prepared Foods
Groceries Utilities
Prescription
Medicines
Educational Study Transportation Services
Telecommunications
Medical Services
Maintenance
and Repairs
Housing Personal Care Services
Clothing Furniture Vehicles
Personal Care Products Office Supplies Appliances Prepared Foods
Groceries Utilities
Prescription
Medicines
Educational Study Transportation Services
Telecommunications
Medical Services
Maintenance
and Repairs
Housing Personal Care Services
Exemptions:
$221 Billion
Taxable Sales: $636 Billion
WHERE IS SALES TAX COLLECTED?
31
LAO California’s Tax System | Sales Tax
Share of Statewide Taxable Sales by Business Type, 2015
2 4 6 8 10 12 14%
Other Non-Retail
Businesses
Other Retailers
Food and
Beverage
Stores
Furniture, Home
Furnishings, Electronics,
and Appliance Stores
Building Materials
and Garden Supplies
Rentals, Real Estate,
and Construction
Clothing and
Accessories Stores
Manufacturing
Gasoline Stations
General
Merchandise
Stores
Wholesalers
Bars and
Restaurants
Motor Vehicle
and Parts Dealers
California’s sales tax rates vary across cities and counties, ranging from
7.25 percent to 10.25 percent. These rate differences result from optional
sales taxes levied by local governments. (The minimum rate in the two
regions shown below is 7.75 percent.)
32
LAO California’s Tax System | Sales Tax
IN SOME REGIONS, CONSUMERS
FACE SEVERAL DIFFERENT RATES
Rates as of April 1, 2018
Richmond
Moraga
Pinole
Alameda County
Contra Costa County
Antioch
Concord
Pittsburg
Orinda
Martinez
Hercules
Pleasant Hill
San Pablo
Hayward
Union City
Newark
San Leandro
El Cerrito
Albany
Hawthorne
Orange County
Los Angeles County
La Habra
El Monte
Inglewood
Commerce
Culver City
South El Monte
Long Beach
Compton
Santa Monica
South Gate
Lynwood
Pico Rivera
Westminster
Fountain Valley
Stanton
La Palma
7.75%
8.25
8.75
9.25
9.5
9.75
10.0
10.25
Downey
33
LAO California’s Tax System | Sales Tax
SALES TAX RATES IN CALIFORNIA COUNTIES
Rates as of April 1, 2018
7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5%
Alpine
Calaveras
Lassen
Modoc
Plumas
Sierra
Sutter
Trinity
Placer
Shasta
Tuolumne
Butte
Tehama
El Dorado
Colusa
Glenn
Siskiyou
Kern
Kings
Yuba
Ventura
Del Norte
San Luis Obispo
Mono
Lake
Amador
Inyo
Mariposa
Napa
San Bernardino
Orange
San Diego
Nevada
San Benito
Sacramento
Yolo
Madera
Imperial
Santa Barbara
Fresno
Merced
Stanislaus
Humboldt
Riverside
Mendocino
Tulare
Solano
Sonoma
San Joaquin
San Francisco
Marin
Contra Costa
Monterey
Santa C
ruz
San Mateo
Santa Clara
Alameda
Los Angeles
Legend
Minimum Maximum
Population-Weighted
Average
10
20
30
40%
Below 7.75 7.75 7.75-9.5 9.5 Above 9.5%
Half of Californians Live Where Rate Is 7.75% or 9.5%
Percent of Population as of January 1, 2017
5
34
LAO California’s Tax System | Sales Tax
This graphic shows how sales and use tax revenues were distributed to the state,
state-funded local programs, and local governments in 2016-17.
DISTRIBUTION OF SALES TAX REVENUE
Behavioral health programs and child welfare services:
$3.6 Billion
Law enforcement activities:
$2 Billion
Mental health programs: $1.1 Billion
Social services programs:
$1.9 Billion
Cash assistance to participants
in the state's welfare-to-work program:
$1.2 Billion
Other programs:
$100 Million
Transactions
and Use Taxes:
$6.3 Billion
2011 Realignment: $6.7 Billion
Transportation programs:
$5.2 Billion
Other:
$1.1 Billion
Total sales and use tax revenue:
$53 Billion
State General Fund: $24.9 Billion
The General Fund—the state's main
operating account—provides funding
primarily for education, health and social
services, and criminal justice programs.
Bradley-Burns
Transportation:
$1.7 Billion
Local Public Safety:
$3.3 Billion
Bradley-Burns
General Purpose:
$6.6 Billion
General funding for city
and county programs.
1991 Realignment:
$3.2 Billion
35
LAO California’s Tax System | Sales Tax
2015-16
PER CAPITA SALES TAX COLLECTIONS BY COUNTY
INYO
KERN
SAN
BERNARDINO
SISKIYOU
FRESNO
LASSEN
RIVERSIDE
MODOC
TULARE
SHASTA
MONO
TRINITY
IMPERIAL
TEHAMA
SAN DIEGO
PLUMAS
MONTEREY
BUTTE
LAKE
LOS
ANGELES
MADERA
MERCED
KINGS
TUOLUMNE
GLENN
PLACER
YOLO
EL
DORADO
COLUSA
SIERRA
HUMBOLDT
MENDOCINO
SONOMA
SAN LUIS
OBISPO
VENTURA
NAPA
SANTA
BARBARA
MARIPOSA
NEVADA
YUBA
STANISLAUS
SAN
BENITO
SOLANO
ALPINE
SAN
JOAQUIN
DEL NORTE
SANTA
CLARA
MARIN
CALAVERAS
ALAMEDA
ORANGE
SUTTER
SACRAMENTO
AMADOR
CONTRA
COSTA
SAN MATEO
SANTA
CRUZ
SAN
FRANCISCO
8
13
19
8
10
Less Than $700
$700-1000
$1001-$1225
$1226-$1400
Over $1400
$433
$297
$338
$1,890
$1,834
$5,462
Sales and
Use Tax
Property
Tax
Personal
Income Tax
Number of Counties in Each Group
Range of Per Capita Tax Collections by County
For Major California Taxes
Excludes Alpine and Mono Counties
36
LAO California’s Tax System | Sales Tax
SALES TAX GROWTH SLOWER
THAN PROPERTY AND INCOME TAXES
Total Percent Change, 2015-16 Dollars
100
200
300
400%
1980-81 1990-91 2000-01 2010-11
Sales and Use Tax
Personal Income Tax
Property Tax
60%
50
40
30
20
1980 1990 2000 2010
One Reason: Taxable Sales Have Shrunk
as a Share of the Economy...
Taxable Sales as Share of Personal Income
300%
250
200
150
100
50
1980 1990 2000 2010
...Because Prices of Goods Have Grown
More Slowly Than Prices of Services
Total Percent Change
Prices of Services
Prices of Goods
2015-16
37
LAO California’s Tax System | Sales Tax
4
CHAPTER
38
LAO California’s Tax System | Other Taxes
39
LAO California’s Tax System | Other Taxes
Beyond the three main taxes covered earlier in this report, the
state and local governments levy a variety of smaller taxes
that collectively sum to just over 10 percent of all tax revenue
collected in the state. These include taxes on corporations,
tobacco, alcohol, diesel and gasoline, insurance, and hotels.
(Tobacco, alcohol, and fuels are also subject to the sales tax
covered in Chapter 3.)
OTHER TAXES
Manufacturing
Retail
Holding
Companies
Financial
Agriculture
and Mining
Construction
Professional,
Scientific, and
Technical Services
Hospitality
and Food
Services
Other
Services
Real Estate
Communication,
Transportation,
and Utilities
100k
50k
10k
5
10
15
20
25%
10 15 20 25%
Percent of Total California Corporate Income
Percent of Total Tax Liability
No Net Income
or Net Loss
Less Than
$1 Million
$1 Million to
$10 Million
$10 Million
or More
40.1%
57.9%
1.8%
0.2%
21.0%
19.7%
59.3%
2.8%
12.4%
13.5%
71.3%
Share of Tax Returns Share of Positive Corporate Income Share of Tax Liability
Number of Taxpayers
Companies in these four
industries make up 24%
of corporate taxpayers but
pay 68% of the tax.
A relatively large number of
corporations in this industry
had no net income or a net loss.
40
LAO California’s Tax System | Other Taxes
California levies a tax on net corporate income. For most corporations,
the tax rate is 8.84 percent. California only taxes the portion of income
that was earned in California.
WHO PAYS CORPORATION TAX?
2 Percent of Corporate Taxpayers Pay 85 Percent of the Tax
Tax Statistics by Income Group, 2015
Manufacturing
Retail
Holding
Companies
Financial
Agriculture
and Mining
Construction
Professional,
Scientific, and
Technical Services
Hospitality
and Food
Services
Other
Services
Real Estate
Communication,
Transportation,
and Utilities
100k
50k
10k
5
10
15
20
25%
10 15 20 25%
Percent of Total California Corporate Income
Percent of Total Tax Liability
No Net Income
or Net Loss
Less Than
$1 Million
$1 Million to
$10 Million
$10 Million
or More
40.1%
57.9%
1.8%
0.2%
21.0%
19.7%
59.3%
2.8%
12.4%
13.5%
71.3%
Share of Tax Returns Share of Positive Corporate Income Share of Tax Liability
Number of Taxpayers
Companies in these four
industries make up 24%
of corporate taxpayers but
pay 68% of the tax.
A relatively large number of
corporations in this industry
had no net income or a net loss.
2015
Net corporate income is all revenues less most of the costs of doing business. These deductions
may include the cost of raw materials, rent, interest payments, and employee compensation.
Many companies have more deductions than their gross revenue, resulting in a net loss.
41
LAO California’s Tax System | Other Taxes
Corporations may apply a credit against their taxes for investing money in ways that further
certain policy goals. In the figure below, the darker, inner pie shows a breakdown of credits in
2015. The lighter, outer segments show the distribution of the two largest credits among various
types of corporations.
CORPORATION TAX CREDITS BY INDUSTRY
-20
-10
10
20
30%
1998 2003 2008 2013
Research and
Development
$1.3 Billion
Enterprise Zones
$450 Million
Electrical and
Electronic Equipment
Pharmaceuticals
Food Products
Chemicals
Other
Manufacturing
Information
Sector
Other
Industrial Sectors
Motion Picture $53 Million
Low-Income Housing $36 Million
Other $57 Million
Transportation and Utilities
Professions and Technical
Finance
Holding Companies
Manufacturing
Other
Retail
The state began phasing out
enterprise zone credits in 2013.
Corporate Profits
Gross State Product
Corporate Profits More Volatile Than State Economy
Annual Percent Change
2015
-20
-10
10
20
30%
1998 2003 2008 2013
Research and
Development
$1.3 Billion
Enterprise Zones
$450 Million
Electrical and
Electronic Equipment
Pharmaceuticals
Food Products
Chemicals
Other
Manufacturing
Information
Sector
Other
Industrial Sectors
Motion Picture $53 Million
Low-Income Housing $36 Million
Other $57 Million
Transportation and Utilities
Professions and Technical
Finance
Holding Companies
Manufacturing
Other
Retail
The state began phasing out
enterprise zone credits in 2013.
Corporate Profits
Gross State Product
42
LAO California’s Tax System | Other Taxes
FUEL TAXES
California levies several taxes that specifically apply to transportation fuel. These taxes include
gasoline and diesel excise taxes, which are collected from distributors when they remove the fuel
from terminals or refineries. They also include diesel sales taxes, which are collected at the point of
retail sale, just like other sales taxes.
Fuel Taxes Raise About $9 Billion Annually
2018-19 Projections
$0.8
Billion
$1.2
Billion
$7.1
Billion
Diesel
Sales Tax
Diesel
Excise Tax
Gasoline
Excise Tax
Diesel
Over 18 Billion Gallons of Fuel Sold Annually
2018-19 Projections
2.8 Billion
Gallons
Gasoline
15.8 Billion Gallons
Over Half of Fuel Tax Revenues Spent on State Highways
2018-19 Projections
Other
Public
Transportation
Local Streets
and Roads
State Highways
43
LAO California’s Tax System | Other Taxes
INSURANCE TAX
Personal Auto
$25 Billion
Commercial Auto
$3 Billion
Marine
$3 Billion
Workers'
Compensation
$13 Billion
Earthquake
$1 Billion
Fire
$948 Million
Mortgage Guarantee
$459 Million
Medical Professional Liability
$450 Million
Other
$12 Billion
Life
$16 Billion
Annuity
$24 Billion
Accident and Health
$16 Billion
Other
$12 Billion
Title Insurers
Property and Casualty
Life Insurers
Homeowners
$8 Billion
$2 Billion
Insurance Tax Generates $2.3 Billion Trends in Insurance Tax Base
$1,518
Million
$802
Million
Property &
Casualty
Life
$1 Million
Ocean
Marine
$13 Million
Title
20
40
60
$80
1991 1996 2001 2006 2011 2016
Special rules apply
to title and ocean
marine insurers
Life
Property & Casualty
Title
Annual Premiums, In Billions State General Fund, 2016
The state levies a 2.35 percent tax on insurance premiums. Insurance companies pay the insurance
tax instead of the corporate income tax.
Insurance Tax Base: $137 Billion in Premiums
2016
44
LAO California’s Tax System | Other Taxes
ALCOHOLIC BEVERAGE TAX
$198 Million
$136 Million
$26 Million
$4 Million
Beer
Wine
50
100
150
200
250
300
1960 1970 1980 1990 2000 2010
Spirits
Alcohol Consumption Trends
Annual Drinks Per Capita
The state levies an excise tax on alcoholic beverages. The tax is levied on distributors (such as
wholesalers) based on the volume and type of beverage sold. Revenue from this tax is deposited into
the state General Fund, which provides funding primarily for education, health and social services, and
criminal justice programs. Revenues from the tax totaled $363 million in 2015-16.
45
LAO California’s Tax System | Other Taxes
The state levies excise taxes on tobacco products. The taxes are levied on distributors (such as
wholesalers). The tobacco tax is levied on cigarettes on a per-cigarette basis. Currently, the tax rate is
equivalent to $2.87 per pack. The tobacco tax on other tobacco products—such as chewing tobacco
and electronic cigarettes—is levied as a percent of the wholesale price. The current rate is equivalent to
$3.37 per pack of cigarettes.
TOBACCO TAXES
Breakdown of Tobacco Tax Rates and Spending
$2
$.50
$2
$0.87
$.50
Cigarettes
Other Tobacco Products
$0.25
Proposition 56 rate:
Medi-Cal and various other purposes
Proposition 10 rate: early childhood development programs
$0.02 for breast cancer research
Proposition 99 rate: tobacco-related programs,
other health programs, environmental protection,
and recreational purposes
$0.10 deposited into state General Fund
0.5
1.0
1.5
2.0
$2.5
1959-60 1979-80 1999-00
50
100
150
1959-60 1979-80 1999-00
Tobacco Tax Revenues Have Increased
Due to Rate Increases
2018-19 Dollars, In Billions
Annual Per Capita Consumption of Cigarettes
Has Decreased Dramatically
Packs Per Year
Legislative Increase
Proposition 99
Proposition 10
Proposition 56
2017-182018-19
46
LAO California’s Tax System | Other Taxes
HOTEL TAXES
10 20 30 40 50 60 70%
Mammoth Lakes
Yountville
Calistoga
Solvang
Avalon
Pismo Beach
Angels
Anaheim
Indian Wells
Big Bear Lake
Rancho Mirage
Burlingame
South Lake Tahoe
Bishop
Half Moon Bay
Ojai
Monterey
Dana Point
Morro Bay
Goleta
Millbrae
Fort Bragg
West Hollywood
Crescent City
Palm Springs
Carmel-by-the-Sea
Plymouth
Carpinteria
Westlake Village
Coronado
Pacific Grove
Point Arena
Needles
Sonoma
Palm Desert
Napa
Healdsburg
Garden Grove
Buell
ton
San Diego
San Francisco
Los Angeles
San Jose
Statewide Average
Hotel taxes make up
more than 25 percent
of general purpose
tax revenues in 39 cities.
By contrast, hotel tax
revenues in these four
cities make up a lower
share of city budgets,
but make up about
40 percent of all hotel
taxes collected in the state.
1
2
$3
2002-03 2015-16
Hotel Tax Revenues Have Doubled Since Great Recession
2015-16 Dollars, In Billions
Most Hotel Spending Is Where Rate is 10% or 14%
In Billions, 2015-16
1
2
3
4
5
6
7
$8
<7% 7-8 8-9 9-10 10-11 11-12 12-13 13-14 14-15 >15%
Cities
Counties
Transient occupancy taxes are imposed on stays at hotels, motels, and similar accommodations. As such, the
tax typically is paid by visitors from outside of the city or county in which the tax is levied. While some cities
rely heavily on the hotel tax, statewide the tax makes up less than 10 percent of city tax revenues.
Hotel Taxes as a Share of Total Tax Revenues
47
LAO California’s Tax System
GENERAL RESOURCES
LAO Economy & Taxes Blog (www.lao.ca.gov/LAOEconTax) and Twitter (@LAOEconTax)
PERSONAL INCOME TAX
Volatility of the Personal Income Tax Base (Report)
Volatility of California’s Personal Income Tax Structure (Report)
PROPERTY TAX
Understanding California’s Property Taxes (Report)
Understanding Your Property Tax Bill (Blog Series)
Calculating Your 1 Percent Tax (Video)
The 1 Percent Tax—Where Does Your Money Go? (Video)
Common Claims About Proposition 13 (Report)
The Property Tax Inheritance Exclusion (Report)
SALES AND USE TAX
Understanding California’s Sales Tax (Report)
Why Have Sales Taxes Grown Slower Than the Economy (Report)
TAX EXPENDITURES
Review of the California Competes Tax Credit (Report)
California’s First Film Tax Credit Program (Report)
Community Development Financial Institution Tax Credit (Report)
Options for Modifying the State Child Care Tax Credit (Report)
ADDITIONAL LAO RESOURCES
48
LAO California’s Tax System
This report was prepared by Ryan Miller and Vu Chu, with assistance from Carolyn Chu, Justin Garosi,
Seth Kerstein, Brian Uhler, and Brian Weatherford. The Legislative Analyst’s Office (LAO) is a nonpartisan
office that provides fiscal and policy information and advice to the Legislature. This report and others, as
well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov.
LAO PUBLICATIONS
