Senate budget subcommittee advances four revenue trailer bills after hours of debate over MCO tax, software sales tax and a 'fair share' study

The California State Senate budget subcommittee heard presentations, questions and public comment on four budget trailer bills and voted to send each to the Senate floor.

Chair Laird opened the session and outlined the process: presentations by the Department of Finance and the Legislative Analyst's Office, combined questions on all four bills, public comment and then roll‑call votes. Erica Lee of the Department of Finance described the package: AB 110 (technical and budget act amendments); AB 122 (revenue trailer to extend sales/use tax treatment to prewritten software, limit business tax‑credit refundability and add a 100% tax on certain federal settlement funds); AB 125 (a renewed managed care organization, or MCO, tax to start 01/01/2027); and AB 177 (a study directing the Department of Finance to present options to assess large employers for the state cost of employees enrolled in Medi‑Cal).

Why it matters: lawmakers said the measures are part of a negotiated package to address a structural shortfall and to preserve health‑care and other social services after changes in federal rules. Opponents warned the measures could raise costs for consumers and businesses; supporters said the bills protect Medi‑Cal and push large employers toward fairer contribution.

Department of Finance overview and funding details Erica Lee summarized each trailer bill. On AB 125, Aaron Edwards of the Department of Finance told the committee that the MCO tax proposal would allocate approximately $300 million to fund targeted rate increases that took effect January 1, 2024, for primary care, maternity and certain mental‑health services, and that roughly $2.0 billion in annual revenues would be available to support the Medi‑Cal program overall. "First, that would be about $300,000,000 allocated to support targeted rate increases," Edwards said, describing the prioritization.

On AB 122, Finance staff said the measure modernizes the tax base by treating prewritten software delivered on discs, downloaded or accessed remotely as subject to sales/use tax beginning 01/01/2027 and would temporarily extend a $5,000,000 business tax‑credit cap while imposing a permanent limitation in later years. The bill also includes a provision taxing certain federal settlement payments at 100 percent, the administration said.

On AB 177, Finance said the bill directs the administration to bring back fully developed options — including statutory language, data and implementation timelines — to assess large employers for the state costs of employees enrolled in Medi‑Cal; one option must include an employer‑paid premium for firms with at least 250 employees.

Key points of debate Committee members pressed staff on multiple fronts: - Definitions and scope: Several members asked whether AB 177 defines "employer" or "employee" and whether part‑time or seasonal workers would be included; staff said the bill directs study and that definitions would be developed when trailer‑bill language is drafted. "Right now, it is just a concept," the Department of Finance said about AB 177's direction to study options. - Federal interaction: Members repeatedly asked how the MCO tax interacts with HR 1 and Proposition 35. Finance said federal approval is required for an MCO tax structure that would draw federal matching funds and that the department intends to submit options that comply with federal rules while preserving the goals of Prop 35 where possible. - Consumer impacts: Several speakers raised concern that the MCO tax (imposed on health plans) could be passed through to enrollees as higher premiums; Finance said plans will respond differently and that some costs will be borne by plans while others may be reflected in premiums. The budget includes a $300 million Covered California allocation intended to help consumers, the department said.

Public comment and stakeholder positions More than 40 stakeholders spoke during the public comment period. Business groups and trade associations urged the committee to reject or amend AB 122 and the R&D cap, warning it would raise costs for businesses and harm competitiveness and small businesses. Health plans, hospitals, unions and advocacy groups largely supported the MCO tax and AB 177 as necessary revenue and accountability tools to protect Medi‑Cal and services for Californians.

Votes at a glance - AB 110 (budget act technical trailer): Passed out of the subcommittee, 13–5. - AB 122 (software sales/use tax, R&D credit cap and related revenue changes): Passed out of the subcommittee, 11–5. - AB 125 (renewed MCO tax): Passed out of the subcommittee, 10–5. - AB 177 (Department of Finance study on employer assessment/fair share): Passed out of the subcommittee, 12–5.

What comes next Each bill was reported out to the full Senate for further consideration. Committee members and staff said the administration will return proposed statutory language, data and implementation details for the fair‑share options and that the MCO submission to federal authorities will be needed to secure matching funds. The committee recessed pending arrival of members from other hearings and to lift roll‑call holds.

Quotes that capture the hearing "This does not turn on the contribution and does not generate revenue at this point, but it does create the fair share from Big Corporations Act, to begin holding companies accountable for the taxpayers cost of providing health care to their employees," Chair Laird said about AB 177.

"Our intent is to use these revenues to support the medical program," Aaron Edwards (Department of Finance) said of AB 125, adding the $300 million and roughly $2 billion figures used to describe prioritization.

Ending After more than an hour of technical explanation, lengthy member exchanges and a broad public comment record, the subcommittee advanced the administration's trailer bill package and directed staff to return with more detailed options and statutory language as the budget negotiations continue.