Newsom’s California Health Tax Scheme

The Wall Street Journal’s recent editorial board article about California Governor Gavin Newsom’s plan to raise taxes on commercial health plans, has eyebrows and blood pressure raising as well. Californians, are already paying some of the highest health insurance premiums in the country, but are about to get hit with another bill courtesy of Gov. Newsom and California’s Democrat politicians.

Last year’s GOP tax bill clamped down on a Medicaid financing scam that states use to launder federal money, the WSJ explains:

Newsom is wrangling with his Democratic Legislature over his proposal to raise taxes on commercial health plans. The state currently levies a tax on Medicaid managed care plans that is 122 times larger on a per-enrollee basis than the tax on commercial plans.

California has long imposed a much higher tax on Medicaid managed care plans (Medi-Cal) — around $274 per enrollee per month — compared to a low rate of roughly $2.25–$2.50 on commercial plans, employer-sponsored plans, Covered California/ObamaCare. This generated significant net revenue (over $7 billion annually in some estimates) for the state budget while drawing down federal matching funds, according to the Taxpayers Protection Alliance.

However, new rules under 2025’s H.R. 1 under the Trump administration, prohibit states from taxing Medicaid plans at much higher rates than commercial ones. California must make the tax more uniform or risk losing federal funding.

One of the most interesting things taking place is opponents of the plan include not just the California Small Business Association, which has pointed out the legal problems it faces, but major labor unions like the Service Employees International Union – United Healthcare Workers West, Teamsters California, and the State Building and Construction Trades Council, the latter of which has outsized clout in the Hispanic community especially. They “oppose” Newsom on this. So he doesn’t even have base support for it.

“Incredibly stupid” one health consultant told me.

So now, Gov. Gavin Newsom has proposed a new $8.85-per-month, per-enrollee tax on commercial health plans, including employer-sponsored coverage, ObamaCare plans, and Medicaid. If it passes, the California Association of Health Plans estimates that families will see their premiums rise by roughly $400 a year. That’s not a projection from a partisan think tank. It’s an estimate from the insurance industry itself, and even sources typically sympathetic to expanded healthcare coverage aren’t disputing the math.

Newsom’s tax is expected to generate roughly $575 million in 2026-27, ramping up to about $2.3 billion annually in later years.

To understand how California got here, you need to know a little bit about how Sacramento has been financing Medi-Cal for years. The state levies a tax on Medicaid managed care plans that, until now, was 122 times higher per enrollee than the tax on commercial plans. That lopsided structure was no accident. States discovered long ago that they could pour tax revenue into Medicaid, then collect a federal match of anywhere from 1 to 9 dollars for every state dollar spent. The tax essentially became a printing press for federal money, allowing California to shift Medicaid costs to Washington while freeing up state funds for other priorities.

Congress shut that down last year. The GOP tax bill prohibited states from creating new provider taxes or increasing existing ones, and required California to equalize its rates across commercial and Medicaid plans. Facing a $16 billion budget hole, Newsom’s response wasn’t to cut spending. It was to raise the tax on commercial plans to bring them up toward Medicaid levels.

The proposal comes with a feature that ought to alarm every employer doing business in California. Under the current framework, even if a company lays off a worker or moves that employee to another state, the health plan could still be on the hook for the tax. Call it a “ghost tax.” It means that insurers will have every incentive to pass these costs along broadly, spreading the pain across their entire book of business, not just their California enrollees.

Newsom has tried to frame his proposal as a necessary response to federal cuts, accusing Republicans of driving up healthcare costs by allowing pandemic-era subsidies to expire. That talking point falls apart quickly. The premium hike Newsom is proposing could cost families more than the subsidy changes he’s decrying. It’s a strange argument to make: to protect people from premium increases requires imposing a larger premium increase.

There’s also the question of where the money is going. Rather than directing the new tax revenue to Medi-Cal providers, Newsom’s plan sends it into the general fund. That has infuriated health advocates, Democratic legislators, and providers alike. Even members of his own party are pushing back, worried the plan could be struck down in court, given that California voters passed a 2024 referendum capping the commercial health plan tax at $2.50 per enrollee per month. If that legal challenge succeeds and the tax is voided, federal law would bar California from imposing a new provider tax, leaving an enormous hole in an already strained budget.

California is projecting $220 billion in Medicaid spending in the coming fiscal year, part of a total state budget of $540 billion. There is no shortage of places to look for savings if the political will existed to find them. What Newsom has chosen instead is to paper over a structural budget problem by taxing the health coverage of working Californians, then leave the consequences to whoever comes after him.

California families are already struggling with the high cost of living. A $400-a-year premium hike, imposed to fill a budget hole created by Sacramento’s own fiscal gimmicks, is not a healthcare policy. It’s a tax increase wrapped in healthcare.