California faces backlash over what critics describe as its largest ever tax hike

Two taxes spark a fierce response

California’s latest budget brings two tax changes that have drawn sharp criticism from business groups, health plans, and Republican lawmakers worried about already-high living costs across the state.

Supporters say the measures protect Medi-Cal and modernize outdated sales tax rules. Critics argue families and companies may ultimately pay more through premiums, subscriptions, prices, fees, and services.

Why critics use record-setting language

Opponents have described the package as California’s largest tax increase, but that label reflects political criticism rather than an official state ranking based on complete historical comparisons.

The two measures could raise billions once fully operating. Their effects differ, however, because one targets health plans while the other broadly expands sales tax to digital software.

Health plans face a redesigned tax

California redesigned its managed care organization tax after federal rules limited states from charging Medicaid plans more than commercial insurers for similar coverage arrangements and health services.

The new structure sets a monthly assessment of $8.85 per enrollee across plans. Officials expect it to preserve funding needed for Medi-Cal services and provider payments across California.

Premium concerns drive the backlash

The tax applies directly to health plans, not household bills. However, insurers say those added costs normally become part of premiums paid by workers, employers, and families.

The Legislative Analyst’s Office estimated premiums could rise about 1.5% if plans pass along the entire charge. Actual increases may differ by insurer, employer, plan, and coverage type.

A family estimate needs context

The California Association of Health Plans estimates the change could add more than $400 yearly for a family of four, not $400 every month as some claims suggest.

That figure comes from an industry group opposing the measure. Final household costs will depend on plan pricing, employer contributions, subsidies, and federal approval of the tax.

Medi-Cal funding shapes the decision

State finance officials say the redesigned assessment should generate about $2.3 billion annually. Roughly $2 billion would support existing Medi-Cal services under the current state budget plan.

Another $300 million would maintain earlier payment increases for providers offering primary, maternal, and mental health care. Supporters say losing that funding would threaten patient access across California.

Software purchases enter the tax base

California will expand sales tax to prewritten software delivered by download or remote access, including many subscriptions commonly described as software as a service products purchased today.

The change begins January 1, 2027. Software already sold on physical media can face tax, so officials describe the policy as equal treatment across delivery methods statewide.

Businesses may carry much of the cost

A large share of newly taxed software is purchased by businesses for accounting, communication, design, security, and daily operations rather than for personal entertainment or household use.

The Legislative Analyst’s Office warns that business-to-business taxes can raise consumer prices indirectly. Companies may pass expenses forward or change how they organize software systems, services, and purchases.

Revenue estimates reach into the billions

The administration expects the software change to raise about $450 million for the General Fund and $560 million locally during the first half-year of operation beginning in 2027.

For 2027-28, projected yearly revenue rises to $900 million for the state and $1.1 billion for local governments, although actual collections could differ substantially from current estimates.

Little-known fact: California currently has record revenue and a record budget, yet lawmakers are still considering a broad new tax increase on every business.

Custom software keeps an exception

Software created specifically for one customer remains exempt under the new rules. That distinction matters because custom systems often require extensive design, coding, testing, and ongoing technical changes.

Questions may still arise when standard products receive limited adjustments. Businesses will need clear records showing whether a purchase truly qualifies as custom rather than prewritten commercial software.

Location may determine tax responsibility

The new law focuses on where software is used, not simply where someone downloads or buys it. Out-of-state purchases may still create California use-tax obligations for some customers.

Electronic records, billing details, and user locations may help determine the proper tax. Companies with employees across several states could face more complicated tracking and reporting duties.

Supporters defend the budget choices

Governor Gavin Newsom and Democratic lawmakers say federal funding changes forced difficult decisions. They argue the health tax protects Medi-Cal while the software tax updates an outdated system.

The revised budget also cuts spending and maintains reserves. Supporters say the package balances current needs without abandoning health coverage, education, and other core public services statewide.

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The debate will continue into 2027

Californians will not feel every effect immediately because both measures depend on implementation, pricing decisions, official guidance, and, for the health tax, federal approval before taking effect.

Businesses and families should watch premium notices, software invoices, and state rules closely. The backlash may continue as actual costs become clearer after both changes take effect.

Wondering why California draws so much criticism from outsiders? See how politics, prices, and culture shape the backlash.

Does the criticism over California’s largest-ever tax hike change how you view the proposal? Let us know in the comments.

This slideshow was made with AI assistance and human editing.

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