TL;DR
California’s $351.7 billion tax budget downloaded software for the first time, raising $2 billion a year. A ballot measure would allow the state to save more of the AI IPO windfall.
California Governor Gavin Newsom and top Democratic lawmakers agreed to a state budget of $351.7 billion which will extend sales tax to prewritten software downloaded from the web. The tax is expected to raise $900 million for the state and another $1.1 billion for local governments starting in fiscal year 2028 and annually thereafter, according to Bloomberg.
The change applies to software that was previously only taxable when purchased on a physical disk. “Most of us no longer receive pre-written software on a physical disk. The whole world has already passed that, our tax code has not,” State Senator John Laird said during a legislative debate on June 18.
Republicans argued that the measure increases costs for companies that rely on software ranging from basic office productivity applications to electronic medical records. “For millions of Californians, this is not abstract. This affects real people, real companies. This tax could be the difference between making payroll or not,”said state senator Suzette Martínez Valladares.
The 💜 of EU technology
The latest rumors from the EU tech scene, a story from our wise founder Boris and some questionable AI art. It’s free, every week, in your inbox. Register now!
The budget also includes a measure on the November ballot that would allow California to save more money from revenue increases, such as IPOs planned by California-based OpenAI and Anthropic. The state’s highly progressive tax structure leaves its finances vulnerable to market declines, and the budget leaves $35.2 billion in savings accounts with $4.5 billion in the regular reserve.
The spending plan is Newsom’s last as governor and comes at a time when state finances are being boosted by the rise of AI. But even with better-than-expected tax revenues, the budget is largely lacking in major new spending commitments. Recipients are saving in anticipation of major cuts to federal health care funding under Trump. The deal provides $90 million for struggling hospitals and $250 million for public hospitals, less than half of what hospital systems requested to prepare for more than $3 billion in annual federal cuts.
The budget also expands existing limits on business tax credits, setting a permanent cap in 2030, when businesses will be limited to using $5 million in credits per year or 70% of their tax liability, whichever is greater. A separate proposal for a flat tax on billionaires, backed by a labor union, is advancing to the polls despite Newsom’s attempts to negotiate a compromise. The rise of AI has reshaped California’s tax landscapeBut the state is building reserves rather than spending the windfall, protecting itself against the possibility that the very market that is filling its coffers could suffer a sharp correction.
