When one thinks about taxes in California, one immediately goes to Prop 13, possibly the tax amendment with the widest ranging impact on life in California. The proposition, which passed in 1978 essentially froze property value in place until a property changed ownership. It also froze the rate of property tax at 1% of value at sale. Immediately on effect it drastically reduced funds to the state and to local governments. That plummeting revenue sent them into the dilemma of how to fund their governmental responsibilities.
Since then, the state has relied heavily on the income tax, and some have argued excessively on the wealthiest Californians. The effect without the higher property tax revenue coming in has been a continual cycle of boom and bust. The effort to level out this cycle has resulted in the marginal income tax rate rising to the highest in the nation.
The other tax which has increased to among the highest in the nation is the sales and use tax, the state rate currently 7.25%.
Local municipalities experienced the decreased revenues from the lowering of property taxes in their ability to fund education and other local needs. One of the remedies available, was to levy a local income tax. A few cities, like San Francisco, have taken advantage of this option. But more common are local municipalities levying an increase to the sales tax. This is available to both counties and cities and throughout California these bodies have taken advantage of it to fund schools, roads, county and local services and public health and safety.
While argument has been made that California’s tax code needs change the state finds itself almost in a Catch-22, with making changes to Prop 13 being a sort of “third rail” of reform. Particularly since property prices in California have historically been high compared to the rest of the nation there is little stomach for pushing the property tax higher. Given that limitation the state must rely heavily on income tax and sales and use taxes to fund the state’s business.