California’s Proposed Health Insurance Tax
One of the major changes involves California’s Managed Care Organization tax, or MCO tax.
This tax has existed for years and primarily affects health plans connected to Medi-Cal. However, changes in federal rules mean California can no longer tax Medi-Cal plans at a substantially different rate from private health insurance plans.
The proposed solution? Increase the tax applied to private health plans.
The figure being discussed is approximately $8.85 per enrollee per month, which could translate into roughly $100 or more per year for an individual and potentially several hundred dollars annually for a family.
The California Medical Association has characterized the proposal as approximately a $1.5 billion tax increase, arguing that much of the cost will ultimately be passed on to consumers through higher insurance premiums.
Supporters, however, point out that the revenue isn’t simply disappearing into California’s general budget. The money is connected to maintaining Medi-Cal funding as federal funding rules become more restrictive.
That creates a complicated debate: California needs the revenue to support healthcare programs, but consumers are already dealing with rising insurance and living expenses.
California’s New Digital Software Tax
The other proposal could have an even broader effect on businesses.
California is considering applying its existing 7.25% state sales tax, plus applicable local taxes, to digital software and Software as a Service.
Think about the software businesses use every day:
- Microsoft Office
- QuickBooks
- Slack
- Payroll platforms
- Cybersecurity software
- Accounting systems
- Customer relationship management tools
- Cloud-based business applications
Historically, California’s tax treatment has differed depending on how software is delivered. A physical software product could be taxable, while certain downloaded or cloud-based versions weren’t treated the same way.
Lawmakers argue that this creates an outdated loophole.
In a world where businesses have moved almost entirely from software discs to cloud subscriptions, supporters say California is simply updating its tax code to match how technology is actually purchased in 2026.
But there’s a major concern.
The Tax Pyramiding Problem
Critics aren’t necessarily worried about a single 7.25% charge appearing on your monthly software bill.
They’re worried about what happens after that.
Imagine a manufacturer using accounting software, payroll software, inventory software, cybersecurity tools, and project-management platforms. If those services become taxable, the manufacturer’s operating costs increase.
The manufacturer may then raise prices.
The distributor buying from that manufacturer faces higher costs and may increase prices again. The retailer does the same.
Eventually, the consumer at the end of the supply chain pays more.
That’s known as tax pyramiding—essentially, the same tax-related cost getting embedded into multiple layers of a product or service’s journey.
And according to critics, this could be particularly significant because a large share of the affected software transactions are business-to-business purchases.
So this isn’t necessarily about someone paying a few extra dollars for a personal subscription.
It’s about taxing the digital tools businesses use to operate.
Why Businesses Are Raising Concerns
A coalition that includes major technology and business companies, including Apple and Intuit, has warned that the proposal could increase costs for businesses and consumers.
Intuit’s involvement is particularly notable because QuickBooks is one of the types of software that could be affected.
Critics argue that California should include stronger protections, such as business-to-business exemptions, to prevent the tax from repeatedly moving through the supply chain.
Other states that tax digital software sometimes use exemptions or other guardrails to limit this effect.
California’s proposal, as described in the discussion, does not provide the same broad business-to-business protection.
That distinction could become extremely important for California businesses already dealing with high operating costs.
Why This Matters to Los Angeles Homeowners and Buyers
At first glance, a tax on software doesn’t sound like a real estate issue.
But almost every part of a Los Angeles real estate transaction relies on software.
Title companies use technology.
Escrow companies use technology.
Mortgage lenders use loan-origination and underwriting systems.
Real estate brokerages use customer relationship management platforms, transaction-management software and electronic signatures.
Property managers rely on software for rent collection, tenant screening, maintenance requests and accounting.
If the operating costs for these businesses increase, those costs don’t necessarily disappear.
They may eventually show up in closing costs, service fees, rents, HOA dues or other expenses associated with owning and managing property.
That’s especially important in Los Angeles, where housing affordability is already a major concern.
Construction Costs Could Feel the Impact Too
There’s another connection that’s easy to overlook: housing development.
Los Angeles needs more housing supply, but building here is already expensive.
Developers, architects, engineers and contractors depend heavily on accounting platforms, design programs, project-management software, scheduling systems and other digital services.
If those tools become more expensive, the cost of developing new housing can rise.
A single software tax isn’t going to suddenly add tens of thousands of dollars to the price of a house.
That’s not really the argument.
The concern is that dozens of small increases can accumulate across a complicated industry.
When you’re already operating in one of America’s most expensive housing markets, another layer of costs matters.
Renters and Landlords Aren’t Immune
The same principle applies to rental properties.
Property management companies use software for everything from collecting rent to coordinating repairs. Landlords and property managers may also face higher healthcare expenses for employees or higher premiums if the health insurance tax affects their plans.
Those costs can eventually become part of the economics of owning and operating rental property.
For renters, that could mean additional upward pressure on housing costs.
For landlords, it could mean narrower profit margins.
And for buyers, it could mean more expensive services surrounding a real estate transaction.
Is the New California Tax Already Final?
Not necessarily.
The digital software tax has reportedly been discussed with an effective date of January 1, 2027, rather than the earlier July 1, 2026 date that had circulated.
That delay gives lawmakers more time to negotiate the details.
Potential changes could include business-to-business exemptions, phase-in periods or narrower definitions of taxable software.
In other words, homeowners, business owners and consumers shouldn’t assume that every detail currently being discussed is permanently locked in.
The final legislation matters.
California Is Trying to Modernize Its Tax System
There is a legitimate argument behind these proposals.
California’s tax code was largely designed around an economy that didn’t operate like today’s digital economy.
If two people purchase essentially the same software, should the tax treatment really depend on whether they receive a physical product or access it through the cloud?
Supporters also note that other states already tax certain forms of digital software.
The question isn’t simply whether digital software should ever be taxed.
The bigger question is how California taxes it—and whether the rules protect businesses and consumers from excessive tax pyramiding.
What It Could Mean for Los Angeles
For Los Angeles residents, the bigger story isn’t really Microsoft Word, QuickBooks or Slack.
It’s the cumulative effect.
Higher health insurance premiums. Higher business expenses. Higher property management costs. Higher construction expenses. Higher service costs.
Each increase might look small by itself.
But when you’re already paying one of the nation’s highest housing costs, those small increases can add up quickly.
California’s proposed tax changes are still subject to legislative negotiations, so the final impact remains uncertain. But if you’re buying, selling, renting, investing or building property in Los Angeles, this is a development worth watching.
Because in an already expensive housing market, the little costs have a way of becoming very big numbers.
