California Tax Debate
Governor Newsom's Proposed Tax Hikes Could Worsen California's Affordability Crisis
Anonymous
California is in the middle of an affordability crisis — and Governor Gavin Newsom may be about to make it worse. A recent Public Policy Institute of California poll found that 44% of Californians rank housing costs as their top concern, beating out every other issue. Now, Newsom's budget proposal would add $14.25 billion in new taxes every year.
In total, state lawmakers have proposed raising taxes and fees by more than $805 billion a year, according to CalTax. Critics warn that businesses unable to absorb the hit will pass costs to consumers — or leave the state entirely.
Newsom's Budget Targets Software and Business Tax Credits
The centerpiece of Newsom's May 2026 budget revision is a new tax on digital software downloads and cloud subscriptions — tools like Microsoft Office and Slack. California currently only taxes software sold on physical discs. The new tax would apply a 7.25% sales tax rate to downloads and software-as-a-service products, according to Business Insider.
The budget also makes permanent a cap on how much businesses can use tax credits — limiting it to 50% of what they owe. PwC warned this will force large companies to rethink staying in California. Together, the two measures are projected to raise about $13.1 billion over four years.
Businesses Warn Costs Will Flow Straight to Consumers
The state's own numbers show that 75% of digital software purchases are made by businesses, not individuals, Business Insider reported. That means the tax gets baked into the price of nearly every product or service those businesses sell — a ripple effect economists call "tax pyramiding."
The California Manufacturers and Technology Association called it a "$6 billion a year tax increase" when counting all the downstream business-to-business costs, according to ABC10. Spokesperson Jennifer Kline warned that small businesses will feel the impact the most, since they can't easily absorb new input costs.
Jobs at Risk as Businesses Eye Lower-Tax States
Jon Coupal, president of the Howard Jarvis Taxpayers Association, says the math is simple: businesses that can't pass the taxes on to customers will cut jobs or move. Texas and Nevada have already been recruiting California companies. The $14.25 billion annual tax burden gives them a powerful new pitch.
The Legislative Analyst's Office warned that California already has a "structural budget imbalance" — meaning the state spends more than it brings in on an ongoing basis, according to CalMatters. State spending has grown 30% in just three years. Critics argue this is a spending problem, not a revenue problem.
Affordability Already Ranks as Voters' Number One Issue
PPIC President Mark Baldassare said living costs have become the "root cause" of California's top rankings in both poverty and homelessness. The May 2026 PPIC survey found housing costs (44%) far outpaced the economy (15%) and homelessness (15%) as the top voter concern.
With the June 15 budget deadline closing in, "affordability" has become the central test for every candidate in the 2026 governor's race, according to CalMatters. Adding billions in new taxes — on top of an already record-high cost of living — could define the political debate in California for years to come.
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