As California deals with rising Medi-Cal expenses — including vast sums spent on healthcare for undocumented immigrants — Gov. Gavin Newsom and Democratic leaders are backing a revised tax on health plans. This comes in light of new federal guidelines, which critics fear could shift more financial burdens onto those with private insurance in the state.
The tax proposal has unexpectedly brought together doctors and health insurers in opposition, with many warning it could drive costs even higher in California.
To maintain billions in Medi-Cal funding after the federal government adjusted rules around health-plan taxes that bring in matching funds, Newsom has supported a restructured tax. This tax would increase the rates on private health plans in 2027, pending federal approval, and could lead to higher premiums for consumers. Experts estimate that covering undocumented immigrants could cost California about $12.4 billion in 2025, according to the Associated Press.
Brian Blase, president of the Paragon Health Institute, a conservative organization, was clear when asked if the expansion of coverage for undocumented immigrants necessitated tax hikes: “Yes,” he responded emphatically.
The situation stems from the “One Big Beautiful Bill Act,” which has restricted California’s ability to impose the tax solely on Medicaid insurers. As a result, the state is looking to impose a higher health insurance tax on those with private coverage, leading to potential family insurance costs rising by around $400 a year, according to various estimates. Critics argue this is mainly because California isn’t addressing its unsustainable spending practices and point out that many individuals on the program aren’t even eligible, plus the broadening of Medicaid to cover all unauthorized immigrants.
In response to the federal changes that will end California’s existing health-plan tax framework after 2026, state officials must rethink their financing approach, which has been crucial for Medi-Cal.
The California Medical Association and the California Association of Health Plans are legally challenging the tax increase. Interestingly, both groups often find themselves on opposing sides in healthcare disputes. Their lawsuit claims that the measure contravenes limits imposed by voters on health-plan taxes and how the revenue can be allocated. Proposition 35, the relevant initiative, limits taxation on commercial health-plan enrollment, adding constraints to the state’s compliance with new federal expectations.
“Californians voted for Proposition 35, and the state can’t just disregard that law because it’s inconvenient,” stated California Medical Association CEO Dustin Corcoran in a press release.
Health insurers are warning that the new tax could increase costs directly for consumers. They’re predicting about a $100 hike per person annually, meaning families of four could see an increase of around $400, aside from standard rate hikes.
A spokesperson for Newsom, Tara Gallegos, argued that the proposed tax isn’t illegal under Proposition 35. “The state contests their claims, and we believe the courts will too,” she said regarding the ongoing lawsuit.
H.D. Palmer, from the California Department of Finance, explained that the new tax plan aims to comply with the One Big Beautiful Bill Act. There’s a concern that the current health tax framework might clash with federal law, thus the state is proposing a dual-track approach: one similar to the existing tax structure, which could potentially conflict with federal regulations, and another that aligns with federal provisions by transferring costs to private plans.
California’s struggle to retain residents and businesses has been a hot topic, particularly as rising living costs drive many away. Data indicates that nearly 10 million people left California for other states from 2010 to 2024, while slightly over 7 million relocated to California during that same time frame.
The potential departure of wealthier residents has sparked worries about California’s fiscal future, as it heavily relies on income taxes for revenue.
