than most people expect before they arrive. You can read that piece here: The States That Tax You With a Smile.
This week we move to numbers three and two. California and New Jersey. Both carry a well-earned reputation for being expensive. And yet, even the people who know these states are costly tend to underestimate them. The reputation is accurate. The full picture is worse.
Before we go further, I want to flag something. I have written about California before, specifically in the context of why so many business owners are leaving it for Florida and Texas. Worth your time if you have not read it: Why Entrepreneurs Are Ditching California.
This article goes deeper. Where that one focused on the relocation decision, this one focuses on what the system actually costs and why it is harder to navigate than most people realize until they are already inside it.
California: The State That Taxes You on the Way In, on the Way Up, and on the Way Out
California is genuinely extraordinary in a lot of ways. The economy, the talent pool, the infrastructure for certain industries, it is hard to argue with any of it. But extraordinary ambition tends to attract extraordinary taxation. California has built a system that is as aggressive as any in the country, not just in rates but in reach.
The Rate Is Only the Beginning
The top individual income tax rate in California sits at 13.3% in 2026. Highest in the nation. It applies to income over one million dollars for single filers, which sounds like a high threshold. Until you remember that one business exit, one strong distribution year, or one large capital gain event can push an otherwise moderate earner past that line in a single year.
I have watched that happen to clients who had no idea they were about to become California’s highest-bracket taxpayer until the return was already being prepared.
Still, the rate is almost beside the point once you understand how California treats capital gains.
The federal system taxes long-term capital gains at preferential rates of 0%, 15%, or 20% depending on income. California taxes capital gains as ordinary income. Every dollar. At the full state rate. For a business owner selling a company or liquidating a significant equity position, that difference is not a rounding error.
It changes the math on decisions people spend years building toward. Selling for five million dollars while assuming you will pay long-term rates on the state side is an expensive assumption to get wrong.
The Hidden Layers Most People Miss
California also runs its own alternative minimum tax. That adds a compliance layer requiring separate calculations, and it can produce a higher liability than the standard method. Worth knowing before you assume your return is straightforward.
The Franchise Tax Board is among the most aggressive state tax authorities in the country on audits, residency challenges, and collections. Move out of California without carefully severing every tie the state considers relevant, and it will continue to assert the right to tax your income. Not a hypothetical. A regular part of how California operates, and something I have helped clients navigate more times than I can count.
Layer on top of that a sales tax reaching 10.25% or higher in certain jurisdictions, an SDI payroll deduction that climbs every year, and a regulatory environment adding costs well beyond what shows up on a return. The result is a state that charges aggressively on nearly every front at the same time.
What I tell clients about California is simple. The cost of being there is not just what you see on your return. It is what the system costs you to navigate, to plan around, and eventually to exit. That exit requires more planning than most people expect. California does not let go quietly.
New Jersey: Every Tax, at Every Level, All at Once
New Jersey is the state I think about when someone asks what it looks like when a government decides to tax everything it can reach as aggressively as possible.
The Tax Foundation ranks New Jersey second to last on its 2026 State Tax Competitiveness Index. The description in the report is precise: a state that levies all major categories of tax, typically at high rates and with significant complexity. Most states pick their poison. New Jersey ordered one of everything.
What That Looks Like in Practice
Start with property taxes. The average effective rate in New Jersey runs at 2.42% of home value in 2026. On a $500,000 home, that is $12,100 per year. On a $750,000 home, you are looking at over $18,000 annually. That bill arrives regardless of what the business earned, regardless of what the market did, and regardless of whether it was your best or worst year. Fixed. Large. And compounding steadily against the real cost of building wealth in this state.
Then there is the corporate income tax. New Jersey’s rate is the highest in the country, sitting at 11.5% for corporations with income over one million dollars. For business owners operating through a C-corporation, or planning any transaction involving corporate-level tax, New Jersey extracts more than any other state at that level. Because the state also taxes pass-through income aggressively on the individual side, there is no clean structure that fully avoids the weight of New Jersey’s business environment.
The Tax Most People Do Not See Coming
The inheritance tax catches people the most off guard, particularly those who have accumulated significant value and are beginning to think about how to transfer it. New Jersey is one of only a handful of states that still imposes this tax. It applies to transfers outside the immediate family, meaning siblings, nieces, nephews, and non-married partners can face a meaningful state tax on inherited assets. For anyone who has built something and wants to leave it to the people who matter most, that is a planning problem requiring attention well before it becomes urgent.
This is a conversation I have had with clients who came to me thinking their estate plan was solid, only to discover their New Jersey exposure had never been properly addressed. The retirement series I put together on whether you can actually afford to retire at 65 gets into why these conversations need to happen earlier than most people think.
The PTET Problem
New Jersey also has one of the most complex pass-through entity tax structures of any state that has adopted a PTET. The credit mechanics, the election timing, and the interaction with individual income tax brackets require precision. Almost no margin for error exists. Done correctly, the PTET saves money. Done incorrectly, which happens more often than it should, you end up paying more than you would have without it.
The cost of being in New Jersey is not one big number. It is a hundred smaller ones, adding up every single month.
What These Two States Actually Share
At first glance California and New Jersey do not have much in common. One is the largest economy in the country. The other is a small, dense state on the opposite coast. From a tax strategy standpoint, though, they share a characteristic that explains why both consistently land near the top of the worst-states list.
Both charge you on multiple dimensions at the same time. California carries a high income tax, taxes capital gains as ordinary income, runs its own AMT, charges aggressive sales taxes, and pursues former residents with notable determination. New Jersey holds the highest property taxes in the country, the highest corporate tax rate in the country, an inheritance tax, a complex PTET, and aggressive treatment of international income. Neither state collects heavily in one area and leaves the others alone. Both decided that if there is a dollar to be taxed, they would prefer to be the ones taxing it.
The Cost Nobody Talks About
Navigating either state properly costs money beyond the tax bill itself. The compliance burden, the professional guidance required to avoid the most expensive mistakes, and the planning work needed to exit cleanly all represent real costs. None of them show up in the headline numbers. All of them are very much part of the full picture.
Currently operating in California or New Jersey without a recent review of your entity structure, compensation strategy, and long-term exit plan? That is worth putting on the calendar soon. The piece I wrote on how to assess your tax compliance risks is a reasonable place to start thinking about what that review should cover.
The clients who come out of these states in the best shape are almost always the ones who planned their way through deliberately, not the ones who assumed the system would be fair as long as they paid what was owed.
What Comes Next
Five and four were Hawaii and Connecticut. Three and two are California and New Jersey. Next week, number one gets its own article.
To me… the next article will cover the most burdensome, complex, and non-neutral tax system in the country. The state where combined city and state income tax can reach nearly 15% for high earners. The state where I have seen more preventable financial damage done to well-run businesses than anywhere else on this list.
It earned the top spot. And it earned its own article.
Geography is part of your tax strategy. The business owners who figure that out early tend to keep considerably more of what they build.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
