A new healthcare tax enacted by California Democrats is awaiting approval from the Trump administration, potentially granting former President Donald Trump the authority to block the measure. The tax, included in Governor Gavin Newsom's 2026-27 budget package, requires sign-off from the Centers for Medicare & Medicaid Services (CMS) because it is designed to trigger additional federal Medicaid dollars for the state.
The legislation, Senate Bill 125, imposes a flat $8.85-per-member, per-month tax on commercial health plans, Medi-Cal managed care plans, and Obamacare marketplace plans. This new structure replaces a previous system where Medi-Cal plans were taxed significantly more than private plans, a gap that federal regulators have now prohibited.
Critics, including Republican Assemblyman Carl DeMaio, have labeled the tax a "wolf in sheep's clothing," warning it could increase healthcare costs for California families by approximately $425 annually. Opponents argue that health plans are likely to pass on at least a portion of the new tax burden to consumers and employers.
This tax maneuver is linked to California's Proposition 35, approved by voters in 2024. Initially promoted as a way to strengthen Medi-Cal and improve access to care, the measure was also intended to generate substantial federal Medicaid funding for the state. The process involves California taxing its health plans and then receiving matching funds from Washington, effectively increasing the federal government's share of California's Medi-Cal expenses.
Washington's previous actions to prevent states from gaming provider taxes to maximize federal Medicaid dollars led to the redesign of California's tax structure. The current proposal aims to comply with new federal rules while still securing federal funding, though critics contend it shifts the financial burden to commercial insurance.
The expansion of Medi-Cal, including benefits for undocumented immigrants, has contributed to rising state healthcare costs. Critics argue that instead of addressing the underlying spending issues, Governor Newsom's administration is implementing a new tax structure that could increase premiums for privately insured Californians, as reported by The Wall Street Journal.
The core of the debate lies in whether the Trump administration will approve a financing scheme that critics say subsidizes state budget needs by potentially raising private insurance costs, rather than confronting the rising costs of Medi-Cal itself. The effectiveness of this budget maneuver hinges on federal approval, with the Trump administration holding the ultimate decision-making power.