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Progressive California Democrats, who have long fought and failed to raise taxes on the rich, are renewing their push this year in light of a specific threat: The seismic federal cuts to Medi-Cal, the state’s health care program for the poor.
President Donald Trump’s H.R.1, signed into law last July, is estimated to strip tens of billions a year in state Medi-Cal funding and cause 2 million low-income residents to lose coverage. It has prompted progressive lawmakers and health care advocates to call for higher taxes on corporations or billionaires to keep those at risk of losing benefits on the program.
“We know that you are not responsible for these awful cuts, but now the responsibility does lie in your hands,” Judy Mark, executive director of Disability Voices United, an advocacy group for people with disabilities and their families, told state lawmakers at a January rally. “You have the power to increase our revenue so that we don’t have to make such devastating cuts.”
Progressive lawmakers have introduced at least two proposals to tax corporations, including one that would direct funds toward Medi-Cal. Separately, health care advocates are backing a controversial ballot measure to tax billionaire wealth to replace lost federal dollars.
There’s one glaring problem: Any solution to backfill the Medi-Cal funding could add to the state’s already gigantic structural budget deficit, not reduce it.
The deficit could reach $30 billion in future years — so large that the state is already struggling just to sustain the reduced level of care under H.R.1, let alone paying the federal government’s share.
Backfilling the Medi-Cal cuts would make the gap larger, said Keely Martin Bosler, former state finance director with more than two decades of experience in state fiscal policy. To “maintain the same insured level of coverage, those costs are on top of the deficits that exist, and so that would be significant.”
California, in its fourth consecutive year projecting a deficit, will likely see bigger shortfalls in future years as spending continues to outpace revenue. Even if the state spends nothing to backfill federal cuts, the deficit could reach $22 billion in fiscal year 2027-28, according to Gov. Gavin Newsom’s January budget proposal.
Democratic lawmakers, who already cut certain Medi-Cal benefits and froze new undocumented adult enrollment last year to close a $12 billion budget hole, acknowledge that the state should now combine sustainable revenue increases with ongoing program cuts to address the sizable deficit as recommended by the nonpartisan Legislative Analyst’s Office.
Yet it’s likely that no meaningful revenue increases will materialize this year.
Newsom, in his last year as governor, has opposed any wealth tax over concerns that it would drive high-income earners out of California and dampen the tax base. Passing any tax increases would also require a two-thirds vote in each legislative chamber, a high bar even with a Democratic supermajority.
“I don’t think anything is going to happen this year,” said Senate Revenue and Taxation Committee Chair Jerry McNerney, a Stockton Democrat. “So why look at options that are doomed to fail in the first place?”
A $44 billion problem
The state is constitutionally required to direct roughly 50 cents of each dollar in excess general fund revenue toward K-14 education and reserves. That means the state would need roughly $44 billion in new revenue annually to close a $22 billion budget hole.
Existing legislative proposals don’t come close to raising that much.
Progressive Democrats are consolidating behind a pair of tax proposals, including one that would close the “water’s edge” loophole, which allows multinational corporations that opt in to only pay taxes on income made within borders of California. That allows companies to establish subsidiaries offshore to avoid paying taxes on their profits, said bill author Assemblymember Damon Connolly, a San Rafael Democrat.
Connolly told CalMatters his bill would raise $3 to $4 billion annually. But the revenue could swing, and corporations could still find new ways to reduce their California taxes, according to an LAO evaluation of different tax options.
Acknowledging that the amount wouldn’t close the entire structural deficit, Connolly said it’s “a step in the right direction.”
“It’s only one part of the equation. It’s certainly the time to look at potential revenue solutions but also obviously roll up our sleeves and take a hard look at the budget,” Connolly said. He did not specify which areas he’d consider cutting, saying only that protecting health care is where state lawmakers should “draw the line.”
Another bill by Assembly Health Committee Chair Mia Bonta, an Oakland Democrat, would require businesses whose workers rely on Medi-Cal and food stamps to contribute to a fund to “prevent loss of or to restore” health care coverage under H.R.1. There are no details yet on how much the charge would be.
And there’s the 2026 California Billionaire Tax Act proposed by the SEIU-United Healthcare Workers West, which would apply a 5%, one-time tax on billionaires’ wealth and use most of the revenue to backfill federal health care cuts. The initiative would establish a special fund that would exempt the revenue from constitutionally required deposits into education and savings.
Supporters estimate it would generate $100 billion over five years. SEIU-UHW spokesperson Suzanne Jimenez told CalMatters that it would allow the state to temporarily continue providing Medi-Cal coverage at the same level while giving state leaders time to figure out how best to sustain it.
But even if voters approve the tax measure, critics say the funds could get locked up in court from lawsuits by billionaire taxpayers or by education groups, who might argue it skirts the state’s constitutional requirements to benefit schools. And it’s unclear how the state would sustain the funding after the money runs out: An LAO analysis estimates that the measure could drive away billionaires and reduce income tax revenue the state could collect in future years.
“The first step is to pass the billionaire tax so that we have five years to work on that plan. And then, right after Election Day, we will be ready to work with the next governor to figure out a long-term solution,” Jimenez said.
Taxing the rich frenzy faces an uphill battle
While they might do little to address the state’s structural deficit, proposals to tax the rich shrewdly tap into the public anxiety with “rather extraordinary disparity in the distribution of income and wealth,” said Kirk Stark, a professor of tax law and policy at UCLA.
“I think that targeting the rich is understandable, but I don’t think that it’s really the kind of policy that can be expected to durably address very long-term structural fiscal imbalance,” he said.
More than 60% of California’s likely voters support higher taxes on the state’s wealthiest to help with the state’s budget deficit, according to a February survey by the Public Policy Institute of California.
The sentiment especially speaks to progressives, who have made fighting income inequality a core belief. But even the popular idea faces an uphill climb: Some Democrats contend that raising taxes on the state’s highest earners risks driving them away, especially since the state heavily relies on their income tax.
“The wealthiest Californians are also the most mobile Californians,” said former Assembly Budget Chair Phil Ting, a San Francisco Democrat. “They could easily decide to go domicile in some other parts of the country.”
It also could deter businesses and billionaires from moving to California. “Does it signal that California is not a friendly, accommodating jurisdiction for people who want to amass billions upon billions of dollars of wealth?” Stark said.
Other ideas to address the state’s budget needs more systemically could pose even bigger political risks, especially as the state’s revenue is booming thanks to an AI-driven economy.
Stark said the state should examine its three primary revenue sources: income tax, sales tax and property tax. Since taxing income could dampen the incentive to work, and sales tax could discourage consumption, the state’s property tax — capped at 1% of the property value by Proposition 13 in 1978 — “jumps out as a tax reform that needs to happen in California,” he said.
“Not something that’s going to be just a one-time hit on the elite, but a fundamental, structural reconsideration of how the state of California taxes the value of land and structures.”
But any proposal to reform Prop. 13 would likely ignite a fierce political battle, just like the patchwork of ballot initiatives over the past half-century to amend Prop. 13 by carving out tax breaks or loopholes to hike taxes.
It’s even harder now with affordability being top of mind for Californians, Ting said.
“People are very cost-sensitive because they feel that their groceries are going up, their gas is going up, rent is going up, it’s a very difficult time to introduce even further costs in taxes to middle-class Californians.”
This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.
