California officials are moving to increase the state’s health‑plan tax on private insurers after Washington tightened the rules that allow the state to draw federal matching funds for its Medicaid program. Governor Gavin Newsom supports the redesign, arguing it is necessary to preserve billions of dollars in Medi‑Cal financing.

Why the tax change is needed

Federal regulators will stop allowing California to use its existing health‑plan tax structure after 2026. The state’s current system has generated billions of dollars for Medi‑Cal, the state’s Medicaid program. To comply with the new federal restrictions, the administration is proposing a two‑track tax measure. One track mirrors the existing scheme but could run afoul of federal law; the other conforms to the “One Big Beautiful Bill Act” by shifting more of the cost onto private health plans.

Cost of caring for illegal immigrants

The Associated Press estimates that providing health care to illegal immigrants cost California about $12.4 billion in 2025. Paragon Health Institute president Brian Blase said the state’s expanded coverage creates a fiscal burden that forces the tax increase, which could add roughly $400 per year to a family of four’s insurance premiums.

Legal challenges

The California Medical Association and the California Association of Health Plans have filed a lawsuit claiming the proposed tax violates Proposition 35, a voter‑approved initiative that limits how much the state can tax commercial health‑plan enrollment. “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 CMA CEO Dustin Corcoran.

Health insurers warn the added levy could be passed directly to consumers, estimating an increase of about $100 per person per year. A family of four could see premiums rise by $400 annually on top of normal rate adjustments.

Administration’s response

Newsom spokesperson Tara Gallegos said the governor believes the tax is lawful and expects the courts to uphold it. “The state disagrees with the claims, and we believe the courts will too,” she told Fox News Digital.

Deputy director of external affairs for the California Department of Finance, H.D. Palmer, explained that if the federal government declines to approve the tax structured like the existing plan, Proposition 35 may sunset the measure under current law.

Broader fiscal context

California has experienced a significant outflow of residents and businesses over the past decade, with nearly 10 million people leaving the state between 2010 and 2024. The departure of higher‑income households threatens the state’s revenue base, which relies heavily on income taxes. State officials argue that preserving Medi‑Cal funding is essential to maintaining health‑care access for the remaining population.

What’s next

The lawsuit is expected to proceed through the state courts, while the administration works to secure federal approval for the revised tax. If approved, the new levy would take effect in 2027, potentially reshaping the cost structure for private health‑plan subscribers across California.

Original reporting: Fox News (HLL/CB) — read the source article.