Recent California tax hikes have pushed the top combined marginal rate on wages to 14.6%, driven mainly by a State Disability Insurance payroll tax that jumped from 1.1% to 1.3% in two years and now applies to every dollar of earnings with no cap. Fuel excise taxes climbed again in July 2025, the cannabis excise tax rose from 15% to 19%, a new 11% firearms and ammunition tax took effect in mid-2024, and the first-year franchise tax break for new LLCs and partnerships expired at the start of 2024. The federal SALT deduction cap changes signed into law in 2025 soften the blow for some households but leave higher earners with the same $10,000 ceiling they had before.
SDI Payroll Tax Is the Biggest Change for Wage Earners
Senate Bill 951 removed the wage ceiling on State Disability Insurance contributions starting in 2024. Before that change, SDI was withheld only on roughly the first $153,000 of annual wages. Now it applies to every dollar.
The rate has also climbed each year. It was 1.1% in 2024, 1.2% in 2025, and 1.3% for 2026.1Employment Development Department. Contribution Rates, Withholding Schedules, and Meals and Lodging Values Someone earning $500,000 will pay $6,500 in SDI in 2026, an obligation that did not exist at that income two years earlier. Combined with the top 12.3% income tax bracket and the 1% Mental Health Services surcharge on income above $1 million, the effective top marginal rate on California wages reaches 14.6%.
The nine income tax brackets themselves haven’t changed, and their dollar thresholds still adjust each year to the California Consumer Price Index. The 1% Proposition 63 surcharge on taxable income over $1 million also remains as it was.2Legislative Analyst’s Office. Proposition 63 – Mental Health Services Expansion and Funding The rate you owe on income tax alone is the same. What’s different is what sits on top of it.
Fuel Excise Taxes Rise Every July
Under Senate Bill 1, the California Department of Tax and Fee Administration recalculates gasoline and diesel excise tax rates each July 1 based on the California Consumer Price Index. As of July 1, 2025, gasoline excise tax reached 61.2 cents per gallon and diesel reached 46.6 cents per gallon.3California Department of Tax and Fee Administration. Tax Rates – Special Taxes and Fees – Fuel Taxes
Gasoline was at 57.9 cents per gallon before July 2024, so two annual adjustments added more than 3 cents. The increase is built into the pump price rather than shown as a separate line. Because the formula tracks inflation, the excise tax will keep rising each July as long as California prices trend upward.
Cannabis Excise Tax Jumped to 19%
The cannabis excise tax on a retailer’s gross receipts rose from 15% to 19% on July 1, 2025. State law requires CDTFA to recalculate this rate every two years starting with the 2025–26 fiscal year, and the added percentage is meant to approximate revenue that the eliminated cultivation tax used to collect.4California Department of Tax and Fee Administration. L-979, New Cannabis Excise Tax Rate Effective July 1, 2025
Retailers collect the tax from buyers at the point of sale, so the four-percentage-point increase appears directly on customer receipts. The next scheduled recalculation covers the 2027–28 fiscal year.
New Firearms and Ammunition Excise Tax
Assembly Bill 28 created an 11% state excise tax on retail sales of firearms, firearm precursor parts, and ammunition, effective July 1, 2024. It applies at the point of sale and is separate from the federal Pittman-Robertson excise tax that manufacturers pay.5Legislative Analyst’s Office. The 2025-26 Budget: Update on Implementation of New Firearm and Ammunition Tax Combined federal and state excise taxes on a California firearm purchase now total roughly 21–22%, on top of applicable sales tax.
First-Year Franchise Tax Break for New Businesses Expired
Between 2021 and 2023, Assembly Bill 85 waived the $800 first-year minimum franchise tax for newly formed LLCs, Limited Partnerships, and Limited Liability Partnerships. The exemption expired on January 1, 2024. Any qualifying entity formed since then owes the full $800 in its first taxable year.6California Franchise Tax Board. Limited Liability Company, Limited Liability Partnership, and Limited Partnership First Year Annual Tax Exemption For anyone testing a new business idea, that is $800 they wouldn’t have paid as recently as late 2023.
What About Sales Tax
The statewide base sales and use tax rate remains 7.25%, unchanged by these recent hikes.7California Department of Tax and Fee Administration. Detailed Description of the Sales and Use Tax Rate Voter-approved district taxes still layer on top, and combined rates in some cities exceed 10%. Rates can differ between neighboring cities, so the CDTFA lookup tool is worth checking before a large purchase.8California Department of Tax and Fee Administration. California City and County Sales and Use Tax Rate Information
How the Federal SALT Cap Changes the Math
The state and local tax deduction cap, set at $10,000 by the 2017 Tax Cuts and Jobs Act, made California’s state taxes especially painful for itemizers. The One Big Beautiful Bill Act, signed into law in July 2025, raised the cap to $40,000 for 2025 with 1% annual increases through 2029. For 2026, that puts the cap at approximately $40,400.
The relief phases out. For taxpayers with modified adjusted gross income above roughly $500,000 (also adjusted 1% annually), the deduction shrinks by 30 cents for every dollar above the threshold, floored at $10,000. A California household earning $700,000 or more with substantial state income tax and property tax may still face the same $10,000 effective cap as before. In 2030, the cap reverts to $10,000 for everyone.
The interaction matters because every dollar of California tax you can’t deduct federally raises your true combined burden. A taxpayer in the 37% federal bracket who loses a $30,000 SALT deduction pays roughly $11,000 more in federal tax as a result. That is where many California residents feel the recent state hikes compound most.