Newsom backs revised health tax to offset Medi-Cal costs

Governor Gavin Newsom has supported a redesigned tax on private health plans, a move intended to preserve billions in Medi-Cal financing after federal restrictions altered the state's previous tax structure. The proposal, which would take effect in 2027 if federally approved, has drawn opposition from an unusual alliance of medical associations and insurers who argue it violates existing state law and shifts costs to consumers.

The financial pressure stems partly from the cost of providing healthcare to immigrants without legal status, which the Associated Press reported amounted to an estimated $12.4 billion in 2025. Brian Blase, president of the Paragon Health Institute, stated that expanding coverage to unauthorized immigrants creates a need for California to raise taxes. He told Fox News Digital that the One Big Beautiful Bill Act limited California's ability to target the tax solely at Medicaid insurers, forcing the state to propose raising the levy on those with private coverage. Blase estimated this change would increase insurance costs for families by $400 a year.

Federal changes under the One Big Beautiful Bill Act will prevent California from continuing its existing health-plan tax structure after 2026. H.D. Palmer, deputy director for external affairs at the California Department of Finance, explained that the state is submitting a proposal with two tracks: one similar to the current scheme but potentially non-compliant with federal law, and another that conforms to the new bill by shifting costs toward private plans. Palmer noted that if the federal government declines to approve the tax structured similarly to the existing health plan tax, Proposition 35 may sunset per current law.

The California Medical Association and the California Association of Health Plans are suing to block the tax increase. Their legal challenge is based on allegations that the measure violates Proposition 35, a voter-approved initiative that limits how much California can tax commercial health-plan enrollment. Dustin Corcoran, CEO of the California Medical Association, stated that California voters passed Proposition 35 and made it law, arguing the state cannot ignore that law simply because following it is inconvenient.

Health insurers warn that the revised tax could be passed directly to consumers through higher premiums. Estimates suggest an increase of about $100 per person per year, with a family of four potentially facing an additional $400 annually on top of normal rate increases. Tara Gallegos, a spokeswoman for Newsom, said the governor maintains his tax increase is not rendered illegal by Proposition 35. She told Fox News Digital that the state disagrees with the plaintiffs' claims and believes the courts will side with the administration.

The debate occurs against a backdrop of significant population movement out of the state. Data indicates a net outflow from California between 2010 and 2024, as nearly 10 million residents departed for other states while slightly more than 7 million arrived from elsewhere in the country. This exodus has raised concerns about the state's financial outlook, as the departure of higher-income residents may reduce tax revenue for a government heavily dependent on income taxes.