California collects taxes to fund state programs. The kinds of taxes the state relies on to fill its coffers has changed over time, and that has increased revenue volatility. The state’s major revenue sources have shifted from retail sales and use taxes making up the bulk of major revenue to personal income taxes.
Here is a breakdown of some of the major revenue sources:
California has a progressive income tax, where the state’s top earners pay at a higher rate and provide a bulk of that tax revenue. Over the years, income taxes have become the largest major source of general fund money. Capital gains — money made from investments such as stocks — is also taxed, but that stream of revenue is highly volatile. We’ll talk more about that in a moment.
There is a flat 8.84% tax on the gross taxable income of businesses and corporations doing business in California, excluding some types of business such as sole proprietors and partnerships. Other rates apply to certain types of businesses, such as financial institutions.
Starting in the 2021 tax year, Californians who are shareholders of S Corps. or who have business partnerships could pay into a newly created tax, which effectively allows them to get income tax credits. This has shuffled what could have been income tax revenue into corporate tax revenue as far as the state is concerned, while allowing those individuals to get around federal deduction limits on state and local taxes passed in the Trump administration.
This tax covers the purchase of most physical merchandise — including vehicles — regardless of whether the merchandise was bought at a physical store in California or an out-of-state retailer. While the current statewide sales and use tax rate is 7.25%, that rate can be higher depending on additional taxes levied by cities and counties. Of all the major revenue sources, this one continues to shrink over time.