California’s Newly Signed Tax Hike Has Many Residents Concerned

California’s new budget locks in two tax changes that business groups, health insurers and Republican lawmakers warn will raise costs across the state. Gov. Gavin Newsom signed both measures into law on June 29, 2026, as part of the 2026-27 budget package. Supporters say the changes protect Medi-Cal funding and modernize outdated sales tax rules. Critics argue families and companies will ultimately absorb the costs through higher premiums, subscription prices, and business expenses that get passed down the line.

Critics Call It the Largest Tax Hike in State History

A California Taxpayers Association spokesperson described the two measures as the largest tax increase in the state’s history by dollar amount, according to reporting from ABC10. That label reflects political criticism rather than an official government ranking based on complete historical comparisons. The two taxes function very differently. One reshapes how health plans get taxed. The other expands sales tax to digital software for the first time in California history.

Health Plans Now Owe $8.85 Per Enrollee Monthly

SB 125 restructures California’s managed care organization tax after federal rules blocked states from charging Medi-Cal plans more than commercial insurers for similar coverage. The new law sets a flat monthly assessment of $8.85 per enrollee across all health plans, both public and private, from 2027 through 2029. Officials say the structure preserves funding for Medi-Cal services and provider payments while satisfying new federal parity requirements between Medicaid and commercial insurance.

Insurers Warn Premiums Could Climb 1.5%

The tax applies directly to health plans, not household bills. Insurers say those costs typically flow into premiums paid by workers, employers and families. The Legislative Analyst’s Office estimated premiums could rise about 1.5% if plans pass along the full charge, though actual increases will vary by insurer, employer and coverage type. State finance officials confirmed the tax is expected to generate $575 million in its first year, climbing to $2.3 billion annually by 2027-28.

A $400 Yearly Estimate Gets Misquoted as Monthly

The California Association of Health Plans estimates the change could add roughly $400 a year for a family of four enrolled in private coverage, not $400 monthly as some social media claims have suggested. That figure comes from an industry group opposing the tax, so it reflects one side’s projection. Final household costs will depend on plan pricing, employer contributions, subsidy levels and how insurers choose to distribute the new expense.

Revenue Is Earmarked for the Medi-Cal Stability Fund

Unlike prior versions of the tax, SB 125 routes all revenue into a newly created Medi-Cal Stability Fund rather than the general budget. Lawmakers designed the fund specifically to protect Medi-Cal services and provider payments for primary, maternal, and mental health care from future federal funding cuts. Supporters argue that without this dedicated revenue stream, the state would face difficult choices about which Medi-Cal services to scale back or eliminate entirely.

Software Subscriptions Get Taxed for the First Time

SB 122 extends California’s sales and use tax to prewritten software delivered electronically or accessed remotely, including subscriptions widely known as software as a service. The change takes effect January 1, 2027, applying the state’s 7.25% base rate plus local district taxes. California had been one of the last major states to exempt cloud-based software from sales tax, a gap the new law closes after more than three decades.

Custom Software Stays Exempt, But Businesses Absorb Most Costs

Software built specifically for one customer remains untaxed, since custom systems require extensive individualized coding and testing. Most newly taxed software gets purchased by businesses for accounting, communication, security and daily operations rather than personal entertainment. The Legislative Analyst’s Office warns business-to-business taxes often raise consumer prices indirectly, as companies pass expenses forward through their own pricing rather than absorbing the added cost themselves.

Combined Revenue Could Top $2 Billion a Year

The software tax alone is projected to generate $900 million for the state general fund and $1.1 billion in local revenue annually once fully phased in after 2027. Combined with the health tax’s projected $2.3 billion in 2027-28, the two measures could pull in roughly $4 billion a year from Californians and the businesses that serve them, though actual collections may differ once implementation begins.

The Law Is Signed. The Costs Are Still Unfolding

Both taxes are now settled law, not proposals awaiting a vote. What remains unsettled is how much of the cost lands on ordinary Californians once insurers set premiums and software vendors update invoices. The Legislature made its choice: trade short-term backlash for long-term Medi-Cal stability and a modernized tax base. Businesses and families will feel the real impact starting January 2027, when both measures take full effect.