California is well-known for having high income tax rates. The highest marginal tax rate in California is 12.3% (13.3% including the mental health services tax for incomes over $1 million). This is the highest of any state, so you often see Californians complaining about the high taxes they have to pay. However, the top marginal tax rate does not tell the whole story. In fact, most people in Maryland actually pay higher income taxes than Californians.
But how can that be? It’s because of standard deductions and exemptions, tax brackets, and local income taxes.
Standard Deduction
First of all, California has a higher standard deduction than Maryland. For those who are unfamiliar with a standard deduction, the federal government and some states (including both California and Maryland) allow taxpayers to either take a standard deduction or itemize their deductions. Most taxpayers (around 87%) take the standard deduction on their federal taxes, while taxpayers with higher incomes tend to itemize their deductions. Deductions allow taxpayers to reduce their taxable income, thus reducing their tax burden by the deduction multiplied by their tax rate. Those who earn less than the standard deduction don’t owe taxes.
California’s standard deduction is $5,202 for single filers and $10,404 for married couples filing jointly. Maryland’s standard deduction is a bit more complex. For single filers, it ranges from $1,600 for those making $10,667 or less up to $2,400 for those making $16,000 or more, and for married couples filing jointly, it ranges from $3,200 for those making $21,333 or less up to $4,850 for those making $32,333 or more. As you can see, California’s standard deduction is more than double Maryland’s, which allows more gross income to be deducted without paying taxes on it. In addition, California allows taxpayers to itemize even if they took the standard deduction on their federal taxes, while Maryland does not, which can allow certain taxpayers to have an even higher deduction.
Exemptions
Another difference between the California and Maryland tax code is the value and treatment of exemptions. Exemptions are another way taxes are reduced, often based on the number of individuals included on a single form (taxpayers + dependents) plus additional exemptions for people 65 and over or for those who are blind.
Both California and Maryland phase out exemptions at high gross income, but the income at which the phase out occurs is much higher in California. For California taxpayers, exemptions begin to be reduced over a gross income of $229,908 for single filers and $459,821 for joint filers. For Maryland taxpayers, exemptions begin to be reduced over a gross income of $100,000 for single filers and $150,000 for joint filers. As you can see, California taxpayers are able to make use of exemptions at much higher income levels than Maryland taxpayers.
California’s exemptions are also treated as credits, directly reducing taxes owed, while Maryland’s exemptions are treated as deductions, reducing taxable income. This means that California’s exemptions reduce tax by the same amount no matter what your marginal tax rate is, while Maryland’s exemptions provide less of a reduction in taxes at lower marginal rates.
California’s personal exemptions are actually lower than the maximum amount you can get from Maryland’s personal exemptions. Personal exemptions are those for the taxpayer and their spouse. In California, personal exemptions are worth a tax credit of $140 per person ($280 for a couple). In Maryland, each exemption is worth a deduction of up to $3,200. For a married couple making $150,000, a deduction of $6,400 at the marginal tax rate of 4.75% is worth a reduction in taxes of $304, higher than the credit for Californians. However, due to the phaseout, above$150,000, California’s personal exemption credits are worth more than Maryland’s exemption deductions.
California’s dependent exemption credits are also much higher than their personal exemptions at $433 per person, while Maryland treats dependent exemptions the same as personal exemptions. A $433 credit would be equivalent to a deduction of $9,116 at a tax rate of 4.75%, almost triple the exemption received for a dependent in Maryland. Therefore, families with children have their taxes reduced more in California than in Maryland.
Tax Brackets
The U.S. federal tax system has a tiered structure, in which income is broken into brackets, with higher income being taxed at higher rates. Here are the tax brackets and corresponding income that falls into each bracket depending on filing status in 2022:
This means that a married couple with taxable income of $100,000 would pay 10% tax on $20,550, 12% tax on $83,550 – $20,550, and 22% on $100,000 – $83,550, which equals $13,229. Their marginal tax rate would be 22%, but their effective tax rate would be 10.5% (assuming adjusted gross income of $100,000 plus the standard deduction of $25,900). All of their income is not taxed at the marginal rate, just their income that falls into the top tax bracket.
Similarly, some states, including both California and Maryland, also use a tiered tax system. Here are the 2022 tax brackets for married couples filing jointly in these states:
| CA Tax Rate | Income | MD Tax Rate | Income |
|---|---|---|---|
| 1% | $0 – $20,198 | 2% | $0 – $1,000 |
| 2% | $20,198 – $47,884 | 3% | $1,000 – $2,000 |
| 4% | $47,884 – $75,576 | 4% | $2,000 – $3,000 |
| 6% | $75,576 – $104,910 | 4.75% | $3,000 – $150,000 |
| 8% | $104,910 – $132,590 | 5% | $150,000 – $175,000 |
| 9.3% | $132,590 – $677,278 | 5.25% | $175,000 – $225,000 |
| 10.3% | $677,278 – $812,728 | 5.5% | $225,000 – $300,000 |
| 11.3% | $812,728 – $1,000,000 | 5.75% | $300,000+ |
| 12.3% (w/ MHS) | $1,000,000 – $1,354,550 | ||
| 13.3% (w/ MHS) | $1,354,550+ |
California has a much broader range of tax rates than Maryland, spanning from 1% (for those earning up to $20,198) all the way to 13.3% (for those earning more than $1,354,550). Maryland’s tax rates range from 2% only up to 5.75%. While California’s tax rates appear to be much higher overall, for those earning less than $75,576 in taxable income, even the marginal tax rate for California taxpayers is lower than for Maryland taxpayers. In fact, including the difference in standard deductions, discussed above, the gross income at which Californians pay more in state taxes than Marylanders is around $157,920 for those married filing jointly. Below this gross income, Maryland taxpayers pay higher state taxes.
Local Income Taxes
Another big difference between the two states is local income taxes. California does not have any local income taxes, while each county in Maryland (plus Baltimore City) imposes a local income tax ranging from 2.25% to 3.20%. Where I live in Carroll County, the local income tax rate is 3.03%. In Maryland, the local income tax is a flat rate tax on your total MD taxable income. This is unlike in some other states such as Pennsylvania (where I used to live), where (aside from in Philadelphia) the local income tax is only on earned income and excludes investment income.
These local income taxes in Maryland boost the overall tax rate significantly. Combining state and local taxes, the rates range from 4.25% to 8.95%, still less than in California at the top but much higher at the bottom. Remember, married couples filing jointly in California only have a marginal rate of 4% on up to $75,576 in taxable income. In Maryland, at minimum, taxable income over $3,000 has a tax rate of 7%.
Altogether, including federal, state, and local taxes (plus FICA), a married couple with two kids filing jointly in Carroll County, Maryland pays more tax than a similar Californian household on up to about $710,000 of gross income, as shown in the graph at the beginning of the article.
But Don’t People in California Make More Money And Therefore Pay Higher Taxes?
It’s commonly thought that people in California make a lot more money than people in other states. Thus, you might think that there are a much greater number of people in California who would have to pay tax at the state’s higher marginal rates. However, this is simply not true. According to the U.S. Census, the median household income in California in 2021 was $84,097, while in Maryland, it was actually higher at $91,431. Only 1% of households in California make more than $665,000 (and thus may pay more than Maryland taxpayers). And yes, there are more people in California. There are 13,217,586 households, compared to Maryland’s 2,294,270. But only 132,176 households in California are in that top 1%. That means 2,271,327 households in Maryland (excluding the top 1%) pay more income tax than 13,085,410 households in California.
Okay, But What About Other Taxes?
I was only interested in comparing income taxes, but I will briefly discuss three other often mentioned taxes: property tax, gas tax, and sales tax.
Property Tax
California has a lower average effective property tax rate of 0.71% compared to Maryland at 0.99%. However, the median home price in California is higher than in Maryland ($763,000 compared to $378,600 as of the end of 2022). That means the median property tax payment is $5,417 in California and $3,748 in Maryland. That’s a difference of $1,669.
However, a person with the median income does not necessarily live in a median priced home. In fact, a California household would need to be in the 77th income percentile ($158,500/year) to be able to afford a median priced home with a 6% mortgage rate and 20% down payment. On the other hand, a Maryland household would only need to be in the 40th income percentile ($78,000/year) to afford a median priced home under the same conditions. Correspondingly, more people rent in California than in Maryland. In 2021, 67.3% of homes were owner-occupied in Maryland according to the U.S. Census, compared to 55.5% of homes in California. This means a larger percentage of Marylanders are paying property tax than Californians. However, you could argue that property taxes are included in rents.
Gas Tax
It’s well-known that gas prices are high in California. Some of that is due to the gas tax, which is currently 53.9 cents per gallon. In Maryland, the gas tax is currently 42.7 cents per gallon. However, Maryland residents drive more on average than California residents according to Policygenius (13,490 miles/year compared to 12,524 miles/year). Assuming average fuel efficiency of 22.9 mpg, Californians pay on average $294.78/year in gas tax compared to Marylanders at $251.54/year. That’s a difference of $43.24.
Sales Tax
California does have a higher sales tax rate than Maryland. California’s sales tax rate ranges from 7.5% to about 10% depending on locality, while Maryland’s sales tax rate is generally 6%. Both states exempt most groceries plus prescription drugs, diapers, and feminine hygiene products. The amount you pay depends on how much you spend, so it is hard to do a comparison. However, we can look at averages. According to the Bureau of Economic Analysis, per capita consumption expenditures in California, excluding housing and utilities, health care, food, and gasoline, were $29,704 in 2021, compared to $27,167 in Maryland. Using an average sales tax rate of 8.68% for California, the tax would be $2,578.31 per person, compared to $1,630.02 in Maryland. That’s a difference of $948.29.
How Do These Other Taxes Affect the Comparison?
It may seem like the higher home prices, higher gas tax, and higher sales tax in California could offset the difference in taxes, but this does not appear to be the case. I calculated what the total tax would be for a married couple in Maryland and California at different household income percentiles, including federal, FICA, state, local, property, gas, and sales taxes. To do this, I obtained income percentile data for Maryland and California from DQYDJ. I used the 2021 Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics in combination with the per capita consumption expenditures by state from the Bureau of Economic Analysis mentioned above to estimate expenses for a two individual household by income percentile. And finally, I used Google’s Mortgage Loan Purchase Budget Calculator to estimate home prices for each income percentile with a mortgage rate of 6% and a 20% down payment. You can see the results here:
As you can see, the overall picture is not changed much. Maryland residents still pay higher taxes than California residents up to and including the 97th income percentile. Part of the reason for this is that Maryland residents have higher incomes than California residents up to this same percentile, which means they pay a higher income tax rate on a higher income and have the ability to afford a more expensive home, which they also pay a higher property tax rate on. Interestingly, the difference in taxes is pretty small at low income percentiles. This is because these households do not pay much income tax in either state, but they still have expenses that are subject to sales tax, which is higher in California. However, because Maryland residents have higher income than California residents at these income percentiles, they still end up paying higher tax, at least under these assumptions.
Conclusion
It’s clear that most Marylanders (99%) pay more in income taxes than most Californians, particularly when comparing by income percentiles. It also appears to be true that most Marylanders (97-98%) still pay more in taxes when including property, gas, and sales taxes, although this calculation involved a lot of assumptions. Overall, one of the most important takeaways is that the top marginal tax rate does not tell the full story, and just because the very wealthy pay high taxes does not mean that most people are subject to tax rates that high.
Cozy Nest Egg 