Staff Reports
California just got a new budget. Governor Gavin Newsom signed it into law, and tucked inside are two big tax changes that will hit families and businesses. Democrats who pushed the plan call it a fix to keep Medi‑Cal and services funded. Critics call it the largest tax hike in state history. Both sides may be right — but one side wants to raise bills, not cut spending.
The two tax changes at the center
First, the budget restructures the managed‑care organization (MCO) tax. The new plan sets a uniform charge of $8.85 per member, per month. State estimates say that change will save about $575 million for the General Fund in the first year and roughly $2.3 billion in each of the next two years. But about $1.5 billion a year could come from private health plans, money that insurers might shift onto you in higher premiums.
Second, the budget extends state and local sales and use tax to many prewritten digital software products and software‑as‑a‑service (SaaS). State budget analysts project roughly $450 million in state revenue and about $560 million in local sales tax in the first year, with those numbers growing to nearly $900 million (state) and $1.1 billion (local) later. Translation: more taxes on the apps and software businesses use — and likely higher costs passed down to customers.
“Largest tax increase” and who pays
The California Taxpayers Association is calling this the largest tax increase in state history — by dollar amount — and that label is sticking in the headlines. Democrats argue the moves are revenue modernization and needed to protect Medi‑Cal. But the practical result is clear: employers, policyholders, and everyday consumers bear risk. If insurers raise premiums, workers pay. If businesses pay more for SaaS, prices climb or investments stall.
Why they did it — and the next steps
Part of the reason for the MCO redesign is not politics but federal rules and a state ballot limit. New federal guidance changed how provider taxes can win federal matching dollars. California needed a new design to keep federal money flowing to Medi‑Cal while staying inside legal limits. Still, that technical excuse does not make the sticker shock any smaller. Expect regulatory rulemaking and federal reviews next, and the new software tax is scheduled to start in early 2027 — plenty of time for businesses and voters to notice the higher bills.
Here’s the plain truth: lawmakers could have looked at spending before reaching for new revenue. Instead, Sacramento chose to broaden taxes on health plans and software. That is a big bet on passing costs forward and on taxpayers not pushing back. If Californians want better government, they deserve better than a budget that reads like an invoice. Voters should keep that in mind the next time politicians promise to “protect services” while quietly expanding the tax base.
