California taxpayers face $14.3 billion in annual increases as Newsom’s final budget takes effect

California Gov. Gavin Newsom and Democratic lawmakers approved an estimated $14.3 billion in annual tax and fee increases during the 2025-26 legislative session, according to a report from the California Tax Foundation. The changes include a tax on digital software sales, limits on business tax credits and a renewed tax on health plans, with some costs potentially passed on to consumers.

The findings put California’s tax burden and affordability challenges back in focus as Newsom approaches the end of his governorship and the state prepares for a leadership transition. However, the $14.3 billion figure represents the foundation’s estimate of additional annual costs once the approved measures are fully implemented, not an immediate increase of that amount in every household’s tax bill.

Report identifies 67 tax and fee increases signed into law

The California Tax Foundation’s 2025-26 Tax and Fee Report identified 156 proposals to increase taxes or fees during the two-year legislative session. Of those, 67 were approved by lawmakers and signed into law by Newsom.

The report estimated that the approved measures would generate $14.3 billion in additional annual costs for taxpayers once fully implemented. Lawmakers considered proposals with a combined estimated cost exceeding $803 billion, although most did not become law.

The foundation said it could quantify the projected costs of 48 of the 156 proposals. Fiscal estimates were unavailable for the other 108 measures, highlighting the difficulty of measuring the full potential impact of tax legislation.

The California Tax Foundation is a nonprofit research organization affiliated with the California Taxpayers Association. Its findings provide a detailed tally of enacted tax increases, but the estimates should be understood in that context rather than as a comprehensive independent audit of every measure’s eventual economic impact.

Software subscriptions face a new sales tax in 2027

One of the most significant changes is Senate Bill 122, which expands California’s sales tax to cover many sales of prewritten computer software, regardless of whether the software is delivered on physical media, downloaded or accessed remotely through a subscription. The measure was included in the state’s 2026-27 budget.

The change affects software-as-a-service (SaaS), a business model in which customers pay to use software hosted by a provider rather than installing and maintaining the program themselves. The law is scheduled to take effect on January 1, 2027, potentially affecting businesses and consumers who pay for qualifying software subscriptions.

California’s previous rules generally taxed prewritten software delivered on physical media but did not apply the same treatment to downloaded software or software accessed remotely. The new law expands the tax base to account for how software is commonly distributed today.

Not every digital product or online service will be covered. The law includes exclusions for certain products and transactions, including custom software. The California Department of Tax and Fee Administration has published guidance on how sellers should determine whether electronically delivered or remotely accessed software is taxable.

Business tax credit limits account for billions in projected costs

SB 122 also limits the use of business tax credits, increasing the amount some companies will owe in state taxes. The California Tax Foundation estimated that the software tax and restrictions on business tax credits together would cost taxpayers at least $9.17 billion annually.

The restrictions limit how much eligible businesses can offset their tax liabilities through credits. Under the provisions described in the report, companies generally can claim credits up to the greater of $5 million or 70% of their tax liability.

The California Legislative Analyst’s Office has published separate estimates of the revenue expected from these changes. Its projections differ from the combined estimate cited by the foundation, in part because estimates were developed at different stages and under different assumptions. Those figures should not be treated as interchangeable.

The restrictions are expected to increase state revenue by reducing the tax benefits available to certain businesses. Their ultimate economic effects will depend on how companies respond, including whether they absorb the additional expense, reduce investment or pass some of the costs to customers.

Health plan tax is projected to raise another $2.3 billion annually

The second major budget measure, Senate Bill 125, renews California’s managed care organization (MCO) tax, a levy on health plans that helps fund Medi-Cal, the state’s Medicaid program.

The California Tax Foundation estimated that the renewed tax would cost taxpayers $2.3 billion annually. Together, the health plan tax and the software and business tax credit provisions account for approximately $11.47 billion of the $14.3 billion total identified in the report.

The tax is structured to help California draw federal matching funds for Medicaid spending. The state says the MCO tax provides a dedicated funding stream for Medi-Cal services and health care access.

However, taxes imposed on health plans can also affect the broader insurance market. Depending on the structure of the tax and market conditions, some costs may be reflected in premiums or other expenses. The ultimate effect on individual policyholders will vary, and the full tax amount should not be interpreted as a direct increase in every Californian’s health insurance bill.

Critics warn that higher taxes could worsen California’s affordability challenges

The California Tax Foundation argued that the additional taxes and fees could increase the cost of living as California confronts longstanding affordability concerns.

“When the new taxes and fees approved this session are fully implemented, Californians will be paying $14.3 billion more to their state and local governments, on top of any additional taxes approved in the November election,” California Tax Foundation research analyst Caitlin Herring said in a statement.

“These new expenses will increase the cost of living in this state just as a new governor takes office and begins grappling with California’s ongoing affordability problem.”

The impact on individual residents will vary. Some measures directly affect businesses or specific industries, while others may influence prices, insurance premiums or operating expenses. Dividing $14.3 billion by the number of California households would produce a rough mathematical average, but it would not represent the actual tax increase faced by a typical family.

The key question is how much of the additional expense businesses and health plans pass on to consumers. The report estimates the costs associated with the new measures, but those estimates do not establish precisely how much consumer prices will rise or how much companies will absorb themselves.

California’s gas taxes add to the cost of living

The $14.3 billion in projected annual tax and fee increases is only part of the broader tax burden facing Californians. The state already has the nation’s highest gasoline tax and fee burden, adding to transportation costs for households and businesses.

California’s state gasoline excise tax rose to 63.4 cents per gallon on July 1, 2026, up from 61.2 cents a year earlier, according to the California Department of Tax and Fee Administration. Drivers also pay the federal gasoline tax of 18.4 cents per gallon, along with applicable sales taxes and other fees.

The state excise tax is adjusted annually for inflation under a system established through earlier legislation, including Senate Bill 1, signed in 2017. Consequently, the latest increase is separate from the tax and fee measures counted in the California Tax Foundation’s $14.3 billion estimate.

The U.S. Energy Information Administration reported that California’s gasoline taxes and fees reached 70.9 cents per gallon as of January 1, 2026, the highest level among the states at that time. The California gasoline excise tax subsequently increased again in July.

Gas taxes affect more than drivers filling up their own vehicles. They can add to commuting expenses and the cost of transporting goods, potentially affecting businesses and consumers throughout the economy. Residents who depend on driving to reach their workplaces and have limited public transportation alternatives may have fewer ways to avoid higher fuel expenses.

California officials argue that gasoline tax revenue helps pay for transportation infrastructure, including highway maintenance, local road repairs and transit projects. The California Energy Commission also identifies refining and distribution costs, specialized fuel requirements and environmental programs as factors contributing to the state’s gasoline prices.

The existing gasoline tax does not increase the $14.3 billion figure reported by the California Tax Foundation. Nevertheless, it provides additional context for the affordability debate surrounding Newsom’s record, particularly for households already facing high housing, insurance and transportation costs.

California’s existing tax burden adds context to the debate

California’s broader tax structure has long been a source of disagreement between supporters of public investment and critics concerned about the cost of living and doing business in the state.

California has a high top marginal personal income tax rate, and its combined state and local sales tax rates vary by location. Gasoline taxes and fees also contribute to the expenses residents face when commuting and transporting goods.

The new measures add to this debate because their effects extend beyond the amounts collected directly by the state. Taxes on software and business activity may affect operating expenses, while health plan taxes can influence the cost of providing insurance.

However, the $14.3 billion estimate does not establish how much California’s overall cost of living will rise as a result. Housing costs, energy prices, wages, interest rates and other factors also shape affordability, and the effects of individual taxes depend on how they are implemented.

The report’s findings nevertheless provide a concrete estimate of the additional annual tax and fee obligations associated with measures approved during the 2025-26 legislative session.

Newsom’s final legislative session included competing economic priorities

The tax increases were part of a broader budget agreement that also addressed spending, health care, education and other state priorities. The Legislative Analyst’s Office budget overview describes the final package as a combination of revenue changes, spending adjustments, fund transfers and other measures.

The budget included the software sales tax, business tax credit limits and renewed health plan tax as revenue sources. The health plan levy, in particular, is designed to help support Medi-Cal and draw federal matching funds for eligible health care spending.

Supporters of the measures can point to the state’s need to finance public services and maintain revenue sources as economic conditions and federal policy change. Critics, meanwhile, argue that raising taxes on businesses and consumers risks adding pressure to an already expensive state.

Those competing priorities are important when evaluating the report. The $14.3 billion figure measures the estimated annual cost of the tax and fee increases identified by the foundation, not the net fiscal effect of the entire state budget or the value of the services financed by the revenue.

What the report does and does not include

The California Tax Foundation’s tally focuses on tax and fee increases proposed through legislation during the 2025-26 session. It excludes fines and penalties for violations of state or local laws, as well as certain ballot measures that did not require legislative action.

That distinction matters because the total does not include every potential tax change California voters may consider. The foundation specifically noted that ballot proposals such as Proposition 3, concerning an extension of a temporary personal income tax increase, and Proposition 40, concerning a proposed wealth tax, were outside the report’s scope.

The $14.3 billion estimate also reflects projected annual costs once the enacted measures are fully implemented. It should not be interpreted as the amount immediately collected in the current fiscal year or as a prediction that every affected taxpayer will pay more by the same proportion.

There is also a distinction between the foundation’s estimates and individual state projections. For example, the foundation’s $9.17 billion estimate combines the software tax and business tax credit restrictions, while other analyses have presented separate estimates based on different assumptions and versions of the proposals. Readers should consider those differences when assessing the precise fiscal impact.

For a more detailed examination of the budget’s revenue assumptions, the state’s Legislative Analyst’s Office report provides official estimates for the software tax, business tax credit restrictions and health plan levy.

The next governor will inherit the effects of the new tax laws

With Newsom’s governorship approaching its end, the tax changes will form part of the fiscal and economic landscape facing his successor. The new administration will have to assess how the measures perform in practice, how much revenue they generate and whether they affect prices, business investment or household budgets.

The software tax is scheduled to begin in January 2027, while the restrictions on business tax credits and the revised health plan tax will follow their respective implementation schedules. Actual revenue may differ from projections as businesses adjust, economic activity changes and federal rules affect the health plan levy.

The California Tax Foundation’s report offers a snapshot of the scale of tax increases enacted during Newsom’s final legislative session. Combined with existing expenses such as gasoline taxes, the measures are likely to remain part of the debate over how California funds public services while addressing its affordability challenges.

Whether the new taxes deliver their projected revenue without significantly worsening those challenges will depend on their real-world effects in the years ahead.

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