California Gov. Gavin Newsom and Democratic lawmakers have backed a redesigned tax on private health plans to preserve billions of dollars in Medi-Cal funding, after the federal government tightened rules on how states can tax health insurers to draw down matching funds.
The new tax would raise the levy on private health plans starting in 2027, pending federal approval, and could push up premiums for Californians with private insurance. Health insurers estimate the change could add about $100 per person per year, or roughly $400 annually for a family of four, on top of normal rate increases.
The push comes as California’s Medi-Cal costs have climbed sharply. The Associated Press reported that providing healthcare to immigrants in the country illegally cost the state an estimated $12.4 billion in 2025.
Brian Blase, president of the Paragon Health Institute, argued the state’s expansion of coverage to immigrants without legal status is driving the need for new revenue.
“The One Big Beautiful Bill Act limited California’s ability to target the tax just on Medicaid insurers, so California is proposing to raise the health insurance tax on people that have private coverage … the estimates are that would increase insurance for families by $400 a year,” Blase said. “That is just because California doesn’t want to deal with its unsustainable spending … there are many people on the program who are not eligible for the program, and that is not even accounting for the fact that California has expanded Medicaid to all unauthorized immigrants in the state.”
The redesign is necessary because federal changes will bar California from continuing its existing health-plan tax structure after 2026, forcing the state to rework a financing mechanism that has generated billions of dollars for Medi-Cal.
Doctors and Insurers Join Forces
The California Medical Association and the California Association of Health Plans are suing to block the tax increase. Their objection isn’t that it funds coverage for immigrants without legal status, but that it violates Proposition 35, a voter-approved measure limiting how much the state can tax commercial health-plan enrollment. The alliance is notable because doctors and insurers typically find themselves on opposing sides of healthcare fights.
“California voters passed Proposition 35 and made it law. The state does not get to ignore that law simply because following the law is inconvenient,” said California Medical Association CEO Dustin Corcoran.
Newsom spokeswoman Tara Gallegos said the governor’s office disputes that Proposition 35 makes the new tax illegal. “The state disagrees with their claims, and we believe the courts will too,” she told Fox News Digital.
H.D. Palmer, deputy director for external affairs at the California Department of Finance, said the state is pursuing two tracks to comply with the federal law. One resembles the current tax structure but might conflict with federal rules; the other shifts more cost onto private health plans to meet the new federal requirements.
“If the federal government declines to approve the tax that is structured similar to the existing [health plan tax], Proposition 35 may then sunset per current law,” Palmer said.
A State Already Losing Residents
The dispute arrives as California continues to see residents leave for other states, with cost of living frequently cited as a top reason. One analysis found nearly 10 million people moved out of California between 2010 and 2024, while just over 7 million moved in from elsewhere in the country during that period. The departure of higher-income residents has raised concerns about future tax revenue in a state that relies heavily on income taxes.
