Democrats in the California State Legislature have advanced a budget proposal to Gov. Gavin Newsom that includes significant tax increases, which the California Taxpayers Association estimates could constitute the largest tax hike in the state's history in terms of dollar amount. The measures involve new taxes on private health insurance premiums and software purchases.
The increase on private health insurance premiums is designed to equalize tax rates with those on public health insurance, such as Medi-Cal. Previously, state taxes on Medi-Cal premiums were higher, but the federal government reimbursed these costs. This adjustment aims to align public and private insurance taxation as a result of new federal rules.
Instead of reducing Medi-Cal spending, Democrats opted to raise taxes on private health insurance premiums, a move projected to add up to $400 per premium annually for individuals. The second tax increase targets software purchases, treating them as taxable sales. Democrats estimate this software tax could generate $2 billion to $3 billion over the next few years. However, the California Taxpayers Association suggests the actual revenue could be considerably higher, potentially up to five times the legislative estimate, as increased scrutiny on taxed software transactions could reveal more unreported sales. The association estimates the total potential revenue from this tax could reach $14.25 billion.
Critics argue that these tax increases will negatively impact California's economy. The governor's office has reportedly sought to attribute these tax increases to federal actions, a comparison that has been met with skepticism by opponents who liken it to attributing inflation to external factors.
Proponents of the budget emphasize that these measures are necessary to fund state programs and address budget shortfalls without reducing spending on essential services. The legislative session has concluded with these tax increases moving forward for the governor's signature.