California Tax Increases
California lawmakers approve twin tax hikes impacting health insurance and small business software.
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California lawmakers have passed two tax increases that critics call the largest in state history by dollar amount. The moves will raise health insurance costs by up to $424 per year for a family of four and hit small businesses with a new tax on everyday software tools, according to California Taxpayers Association.
The state already has the highest median home price in the nation and a total tax burden more than 2 percentage points above the national average, according to CalMatters. Many residents and business owners say Sacramento's latest budget deal will make a brutal affordability crisis even worse.
Health Insurance Tax Jumps From $1.75 to $8.85 Per Month
The first measure restructures California's Managed Care Organization tax — a fee charged on health insurance plans. The monthly tax per enrollee rises from roughly $1.75 to $8.85, according to ABC10. That is a more than five-fold increase. The California Association of Health Plans warns this cost will be passed straight to consumers.
The Legislative Analyst's Office projects the change will push premiums up by about 1.5%, or roughly $424.80 per year for a family of four, according to CalMatters. Working families who do not qualify for subsidies will feel the sharpest hit. The restructure is expected to shift about $1.5 billion in annual costs onto private health insurance plans.
New Software Tax Will Hit Small Businesses Hard
The second measure applies California's 7.25% base sales tax to digital software and cloud-based services for the first time, according to PwC. That means tools like QuickBooks for accounting, Gusto for payroll, and Salesforce for customer management will all cost more. The California Chamber of Commerce calls it a "productivity tax" on tools businesses can no longer operate without.
The new software tax is projected to raise between $1.3 billion and $2.9 billion per year by 2029, according to PwC. It takes effect January 1, 2027. Analysts warn it could push tech-heavy companies and startups to route their software purchases through lower-tax states.
Sacramento Says Federal Pressure Left No Other Choice
State leaders argue the health insurance tax change was forced on them. Federal regulators at the Centers for Medicare & Medicaid Services demanded California stop taxing private plans at lower rates than Medi-Cal plans, according to California Department of Health Care Services. Without the fix, California risked losing more than $8 billion in federal matching funds for its Medi-Cal program, which covers 15 million residents.
Senate President Pro Tem Monique Limón admitted the plan was not "perfect" but said, "We have as a Senate been very clear that we needed revenue," according to CalMatters. Governor Newsom framed both taxes as "modernization" of an outdated tax code. Critics say that framing ignores the real costs piling up on families and small businesses.
Political Fallout Could Shape California's 2026 Elections
A coalition of Republican members of Congress sent a formal letter to Governor Newsom on June 25 demanding answers about the healthcare cost impact, led by Rep. David Valadao, according to Office of Rep. David Valadao. Valadao said Sacramento is "ready to shift additional costs onto hardworking Californians" to cover what he called "reckless spending."
The California Taxpayers Association labeled both measures together as "the largest tax hike in state history from a dollar standpoint." With affordability dominating voter concerns, the twin tax hikes are expected to become a central issue in the 2026 gubernatorial and legislative races — and could fuel a ballot initiative push to roll them back by 2028.
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