Checklist: Explain California’s new tax push; detail the specific taxes and projected impacts; highlight expert warnings and likely economic outcomes; note limited political resistance and grassroots conservative efforts.
California is moving forward with a package of tax measures that will hit families and businesses hard, and the state leadership seems content to keep piling on costs. The measures include updated health-plan levies and a new tax on purchases of digital software as a service, which will apply to common products used by millions. Lawmakers and the governor are teeing up what some observers call one of the largest tax increases in the state in years, and it will arrive quickly. The policy choices reveal a tone-deaf approach to incentives and economic survival.
One of the announced changes updates an existing tax on health plans and is expected to lead to roughly $100 per year increases for individuals on private coverage. The other is a brand-new tax that targets software-as-a-service purchases, triggering a tax on apps like Microsoft Office, QuickBooks, Workday and Slack at a base rate of 7.25 percent. Policymakers are treating commonplace business inputs as fresh sources of revenue without seeming to weigh the downstream effects.
California lawmakers and the governor this year are preparing to implement major tax hikes in a matter of weeks, representing one of the largest tax increases in the state within the last decade.
One of the tax increases is an updated tax on health plans. The new tax is expected to result in $100 per year rate increases for individuals on private health insurance.
Another, brand new tax would tax the purchase of digital software as a service for anyone who buys it. Apps subject to the new tax include Microsoft Office, QuickBooks, Work Day and Slack for example. The tax rate starts at 7.25%.
Officials are already selling these measures as modest revenue gains, but business groups warn the effects will be far larger and more destructive. David Kline of Cal Tax warned that layering taxes in this way creates a pyramid of costs at every step of production, multiplying the burden on the final consumer. He cautioned that what may look like a billion-dollar boost to the budget could end up several times larger when cascaded through supply chains. That warning deserves the attention of anyone who cares about jobs, prices and competitiveness.
While the state expects it could result in about $1 billion a year more in revenue for the state, David Kline, the vice president of research and communication for Cal Tax, said it could be five to six times that amount.
“The tax, layering or pyramid, depending on how you want to describe it, that’s the biggest problem,” Kline said. “California has an affordability crisis. And this tax is going to just add a tax extra cost at every step of the process of every product. You know, if you’re manufacturing, you know, widgets, the famous economic item that doesn’t exist, it’s going to cost every step of the way. And ultimately the person at the end is holding the bag,”
That “person at the end” often has another option: leave. For years California has seen an exodus of entrepreneurs, small-business owners and high earners who vote with their feet when the tax and regulatory climate becomes hostile. The state can keep raising taxes and promising to subsidize the fallout, but there is a limit to how many productive people can be retained when costs rise and public services decline. Those who remain will increasingly be either very wealthy and insulated or dependent on government support.
The practical effect of these policies is to hollow out the tax base that governments claim they want to tap. More businesses relocating to lower-cost states, more families moving away to find affordable housing and lower taxes—these are predictable outcomes. Sacramento is effectively nudging commerce toward Texas, Florida and others that have positioned themselves as friendlier to growth and investment.
There is still time in the legislative session for changes, and opponents are mobilizing to highlight the damage these measures could inflict on affordability and competitiveness. Some conservative Californians and local activists are pushing back, arguing for restraint and for policies that instead encourage enterprise and employment. But the political math in Sacramento, with entrenched majorities and a budget process that rewards spending, makes reversals difficult.
“There is some time left in the legislative session for things to be changed. And historically, the legislature has kept working on the budget right up to the end of the session,” Kline said. “So, we’re hopeful that we could convince them to undo some of the damage that these taxes would do.”
The path ahead will be determined by whether taxpayers and businesses can make their voices heard before tax increases become law and before more of the productive class walks out the door. Conservative voices in the state are sounding the alarm and trying to rally support to stop policies that reward dependency while punishing production. That fight will decide whether California remains economically competitive or becomes a shrinking, heavily taxed version of itself.
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