Residents worry California’s latest tax hike could add more pressure to daily costs

Newsom signs two tax changes for 2027

Governor Gavin Newsom signed two tax changes into law on June 29, 2026, as part of California’s 2026 to 2027 state budget. Senate Bill 125 establishes a revised tax on covered health plans, while Senate Bill 122 expands sales and use tax to qualifying prewritten software delivered electronically or accessed remotely.

Supporters say the measures protect Medi-Cal and update old software tax rules. Critics warn that insurers and businesses may pass on additional costs to customers through premiums, subscription prices, service fees, or higher everyday prices in the coming years.

California changes its health tax

Senate Bill 125 authorizes a managed care organization tax for 2027, 2028, and 2029. The law sets an initial rate of $8.85 per countable enrollee per month for covered health plans, although the state may adjust the rate under conditions established in the legislation.

The tax becomes operative January 1, 2027, or when any required federal approval takes effect, whichever is later. It applies to Medi-Cal managed care plans and licensed full-service health plans, subject to the law’s enrollment rules and exclusions.

California puts software on the bill

Senate Bill 122 extends California’s sales and use tax to prewritten software that is downloaded or accessed remotely, including qualifying software subscriptions. Prewritten software delivered on physical media was already generally taxable.

The change begins January 1, 2027. California’s statewide base rate is 7.25%, and applicable district taxes may raise the final amount. Custom software and several categories of digital products remain excluded.

Premiums may feel the pressure

The health plan tax is imposed on covered plans rather than collected from patients during medical appointments. Health plans may attempt to recover some of the expense through future premiums.

The Legislative Analyst’s Office estimated that passing the full $8.85 monthly assessment to consumers would equal roughly 1.5% of average premium costs. Actual changes will depend on the plan, employer contributions, subsidies, benefits, and insurer pricing decisions.

The $400 figure needs context

The California Association of Health Plans estimated that the assessment could add about $100 per insured person annually if plans passed the full cost to customers. Under that projection, a privately insured family of four could face about $400 in additional annual premium costs.

The estimate is not a guaranteed increase and comes from an organization representing health plans. The final amount paid by a household would depend on its insurer, employer contribution, coverage arrangement, and available subsidies.

Medi-Cal gets a protected fund

Revenue from Senate Bill 125 will be deposited in the Medi-Cal Stability Fund. The law continuously appropriates funds for specified Medi-Cal expenses, including administrative costs, plan payments under the tax, certain provider payments, and managed care rates.

The Controller may temporarily use funds in the fund to make authorized cash flow loans to the General Fund. The legislation otherwise directs the revenue to the Medi-Cal program in accordance with the law’s priorities.

Many cloud programs become taxable

Qualifying prewritten software accessed via a website, application, password, or other remote connection generally enters the sales tax base. This may include software used for accounting, communication, security, design, and office operations.

The law excludes digital audio and audiovisual works, digital books, video games, digital visual art, certain digital assets, and defined digital infrastructure. Streaming music and video are therefore not automatically included in the software tax.

Custom programs remain different

Software prepared to the special order of one customer generally remains outside the expanded tax. Prewritten software sold for general or repeated use remains taxable even if the vendor originally developed it for a single customer or for internal use.

A modification made specifically for one customer may qualify as custom software when the charge is separately stated. Only the qualifying modification receives that treatment, while the underlying prewritten program remains taxable.

Little-known fact: If you sell merchandise directly in California, or otherwise operate as a retailer doing business in the state, you’re required to collect and remit tax on your internet sales.

Businesses face much of the change

A substantial share of the newly taxable software transactions is expected to involve business-to-business purchases. Companies use prewritten software for payroll, customer records, cloud operations, cybersecurity, communication, and other routine functions.

Businesses may absorb the tax, reduce other spending, or pass some of the additional expense on to customers. The effect will differ by industry, contract terms, software use, and a company’s ability to adjust its costs.

Your location changes the total

California’s 7.25% statewide base rate is only part of the total due, as district taxes vary by location. For many remote transactions, the seller will use the purchaser’s California address shown in its business records to determine the initial place of sale.

The law also recognizes that software may be used in more than one location and allows methods that reflect where access occurs. Companies with multiple offices or remote employees may need records showing user locations and license assignments.

Big estimates may still change

California projects that the software tax will produce $450 million for the General Fund and $560 million for local governments during fiscal year 2026 to 2027. Full-year estimates rise to $900 million for the General Fund and $1.1 billion for local governments.

The managed care organization tax is projected to provide $575 million during fiscal year 2026 to 2027 and about $2.3 billion in each of the following two fiscal years. Actual revenue will depend on software purchases, plan enrollment, implementation timing, and federal approval.

Costs could move down the chain

Buyers of qualifying prewritten software may see sales tax added directly to invoices or subscription charges beginning in 2027. Businesses may absorb that cost or include part of it in the prices they charge customers.

The health plan assessment works differently because the tax is imposed on covered plans. Any household effect would be reflected in future premium or benefit decisions rather than as a charge collected during a medical visit.

For another California taxpayer update tied to pension debt, public budgets, and future costs, see why the debt showdown is raising new concerns.

The real impact starts in 2027

The software tax becomes operative on January 1, 2027. Sellers and purchasers will need to apply the new rules to qualifying prewritten software that is downloaded or accessed remotely.

The health plan tax begins January 1, 2027, or when any required federal approval takes effect, whichever is later. Premium effects will not be identical across households because insurers, employers, subsidies, and coverage arrangements differ.

For another California tax update tied to household costs, public health funding, and Newsom’s latest move, see why the new Trump-linked fund tax is drawing attention.

Are California families running out of patience with taxes that touch everyday spending? Share your thoughts and drop a comment.

This slideshow was made with AI assistance and human editing.

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