California Approves What Critics Call the Largest Tax Increase in State History

SACRAMENTO, Calif. — Californians could soon pay more for everyday software and health insurance after Gov. Gavin Newsom signed a state budget that includes two significant tax increases: a new sales tax on many software products and an extension of the state’s Managed Care Organization (MCO) tax that funds Medi-Cal.

The new software tax is expected to generate about $900 million annually by applying California’s sales tax to many “prewritten” software products and digital downloads. That includes widely used products such as Adobe software, TurboTax, Slack, artificial intelligence assistants, and other commercially available software.

California’s statewide sales tax is 7.25%, but local taxes push rates in many communities to nearly 12%, meaning consumers could see substantially higher costs on qualifying software purchases.

While much of the tax will initially apply to business-to-business transactions, the nonpartisan Legislative Analyst’s Office says businesses commonly pass those costs on to consumers through higher prices.

The budget also extends California’s Managed Care Organization (MCO) tax on health insurers, projected to raise roughly $2 billion annually for Medi-Cal. Analysts estimate individuals with private insurance could pay about $100 more per year, while a family of four could see premiums increase by roughly $400 annually if insurers pass along the added costs.

Republican lawmakers blasted the tax package as another financial burden on Californians already facing one of the nation’s highest costs of living. They have also urged the Trump administration to review the health care tax, arguing it requires approval from the Centers for Medicare & Medicaid Services.

Gov. Newsom and Democratic lawmakers contend the new revenue is necessary to offset federal funding reductions and preserve California’s health care programs.

The California Taxpayers Association has called the package “the largest tax increase in state history,” while supporters dispute that characterization, arguing the measures are essential to balancing the state’s budget.

With software costs and health insurance premiums poised to rise, the new taxes are likely to become a major issue in California’s political debate heading into the 2026 election.

Sources: California State Budget (2026); California Legislative Analyst’s Office (LAO); California Department of Tax and Fee Administration (CDTFA); California Taxpayers Association (CalTax); Centers for Medicare & Medicaid Services (CMS); reporting by The California Post and ABC10 Sacramento.