Are Taxes Really Lower in California than in Texas?

Marc Joffe

WalletHub recently published an analysis of tax burdens by state that included some surprising findings: most notably, that Texas state and local governments impose heavier taxes on median earners than their California counterparts. Of the fifty states plus DC, the Golden State had the 12^th lightest tax burden, while Texas ranked 41^st.

The counterintuitive conclusion that California is a relatively low tax state caught the attention of State Senator Scott Wiener (D‑San Francisco) trumpeted the results on his Twitter page.

But the WalletHub analysis seems to contradict a Tax Foundation burden ranking which placed the Golden State and Lone Star State 46^th and 6^th respectively.

The difference between WalletHub and the Tax Foundation is partially explained by a different focus. The Tax Foundation is measuring overall tax burden while WalletHub is trying to estimate the impact of taxes on a median family. Since California’s personal income tax is highly progressive, with the burden falling more on high income taxpayers, it is not surprising that WalletHub would come to a different conclusion.

But could it really be true that California taxes average families less than Texas does? After looking through the underlying numbers, I do not think so. As we dive through the numbers, I will explain.

WalletHub’s analysis focuses on a family earning the US median income and owning a home and car both valued at the national median. It does not consider differences in income and cost of living between states.

WalletHub partially offsets this issue by including a second ranking that is adjusted to use each state’s median household income. This alternative ranking narrows but does eliminate the gap between Texas (34^th) and California (32^nd). But it does not fully capture vast differences in real estate values.

Extracting just the numbers for California and Texas from the WalletHub data gives us this comparison:

Unlike California, Texas does not impose taxes on personal income or on the value of one’s vehicle. So, of the four tax categories WalletHub included, only Sales & Excise Taxes and Real Estate Taxes apply in the Lone Star State.

WalletHub estimates Sales & Excise Taxes of $4591 for the theoretical median household in Texas versus only $3292 in California. But sales tax rates are generally lower in Texas than in California. According to the Sales Tax Handbook, combined state and local sales taxes in California range from 7.25% to 10.75%. In Texas, the range is from 6.25% to 8.25% Neither state levies sales taxes on groceries. Gasoline taxes are also much higher in California, weighing in at 53.9 cents per gallon compared to 20 cents per gallon in Texas. Finally, cigarette taxes in California are double those in Texas.

WalletHub based its Sales & Excise Tax Burden estimates on a 2018 report from The Institute on Taxation and Economic Policy which uses a different definition of middle income and relies on 2015 data. It thus misses large increases in gasoline and cigarette taxes California imposed after 2015, along with numerous local sales tax hikes.

WalletHub found an even larger gap for real estate taxes, with the burden in Texas more than double that of California. This discrepancy reflects both an element of truth and a distortion.

California’s Proposition 13 limited property tax rates to 1% plus add‐​ons for voter approved bonds and parcel taxes. Although these add‐​ons can mount up, the total tax bite rarely if ever exceeds 2% of assessed value.

Texas, by contrast, has no similar property tax limitation. Counties, cities, school districts and special districts levy taxes independently, and homeowners must pay the combined rate, which can be quite steep. In the small north Texas community of Darrouzett, four local tax levies totaled an eye‐​watering 4.2% of assessed value in 2022 (according to State Controller data available here).

But there are two caveats to consider. First, home values in Darrouzett are relatively low: a three‐​bedroom house is on the market for $139,000. Second, the homeowner’s exemption plays a role. In California, homeowner occupants can deduct $7,000 from the assessed value of their property before the tax rate is applied. In Texas, the exemption is $40,000 for school districts and variable for other taxing entities.

These factors, especially the difference in home prices, largely offset the tax rate differences between Texas and California. The Zillow Home Value Index is 2.5 times higher in California than it is in Texas. In fact, the median US home value WalletHub used, $244,900, is virtually unheard of in most of California.

All that said, Texas officials have started to recognize that property taxes are becoming onerous. Both the House and Senate have unveiled plans to reduce property tax bills and limit future growth. So, although the WalletHub ranking appears to be misleading overall, it nonetheless highlights a reasonable concern about Lone Star State taxes.