Medi-Cal cuts, tax increases loom as Capitol lawmakers dicker over the budget

The primary election has come and gone. Votes are still being counted and the eventual results in close contests might not be known for weeks.

However, it’s back to work for those already in office, including Gov. Gavin Newsom, and the biggest issue on their agenda is writing a budget for the 2026-27 fiscal year.

The state constitution requires a new budget to be adopted by June 15, leaving little time for Newsom and legislative leaders to resolve many billions of dollars in differences, particularly those involving health and social welfare services to the approximately 15 million Californians poor enough to qualify.

Newsom proposes spending $334.2 billion on those programs — the biggest chunk being Medi-Cal — with three-fourths coming from the federal government. However,  due to recent reductions in federal aid and a chronic state budget deficit, Newsom’s budget would whittle down some services.

That doesn’t sit well with advocates for Medi-Cal recipients. They’ve issued a cascade of critical statements in the two weeks since Newsom released a revised budget.

The skeletal budgets that leaders of the Senate and Assembly have published would restore many of those reduced or eliminated services, although the plans differ in detail. Overall, the legislative budgets would add at least several billion dollars in spending, though they don’t provide precise bottom-line numbers.

There’s also a legislative appetite for increasing taxes, especially on corporations, by changing how multinational companies calculate taxable income or requiring big employers to pay a $285 monthly fee for each employee enrolled in Medi-Cal.

The Senate would adopt the $285 employer fee rather than renew a long-standing tax on health plans called the Managed Care Organization tax, which Newsom and the Assembly support.

Proceeds from the current managed care tax, about $4.5 billion a year, have been used to qualify the state for additional federal healthcare dollars, but it will expire at the end of this year.

The federal government has placed limits on the managed care tax strategy. And in 2024 California voters adopted a healthcare industry ballot measure that requires that the tax proceeds go to medical services rather than non-medical programs.

The California Association of Health Plans has opposed renewing the managed care tax, saying it would violate the 2024 ballot measure and raise consumers’ medical costs by $1.5 billion a year.

The issue typifies the complicated, high-dollar problems Newsom and legislative leaders face as they negotiate whether to backfill federal aid reductions, whether to restore services Newsom would cut and whether new taxes are the solution.

While health and welfare issues, by dint of their high costs, may dominate the negotiations, there are many other points of contention for Newsom and legislative leaders as they draft what will be Newsom’s eighth and last budget.

He has claimed his revised budget would cover the gaps between income and outgo that first emerged in state finances in 2022 and have continued ever since. Thus, he has said, his successor will not be troubled by what’s termed a “structural deficit” upon taking office next January.

However, most of the proposals to narrow the deficit are temporary in nature, such as transfers from the state’s emergency reserves, off-the-books loans and what may be a short-lived surge in revenues from taxes on the artificial intelligence boom.

The Legislature’s budget analyst, Gabe Petek, has warned in a review of Newsom’s budget, that “given the state’s diminished reserves and already accumulated wall of debt, California is ill-prepared for even a slip in revenues.”

Unfortunately, as they resolve their specific differences and write a budget by the June 15 deadline, lawmakers and Newsom are more likely to continue patching budget holes than to permanently close them.