California’s wealth tax could hurt the state’s budget problem

from Yue Stella YuCalMatters

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Progressive California Democrats, who have long fought and failed to raise taxes on the wealthy, are renewing their push this year in light of a specific threat: seismic federal cuts to Medi-Cal, the state’s health care program for the poor.

President Donald Trump’s HR1, signed into law last July, is expected to strip tens of billions in annual state funding to Medi-Cal and cause 2 million low-income residents to lose coverage. That has led progressive lawmakers and health care advocates to call for higher taxes on corporations or billionaires to protect those at risk of losing benefits from the program.

“We know you were not responsible for these terrible cuts, but now the responsibility is 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 rally in January. “You have the power to increase our revenue so 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 to Medi-Cal. Separately, health care advocates are backing a controversial ballot measure to tax the wealth of billionaires to replace lost federal dollars.

There’s one obvious problem: Any decision to top up Medi-Cal funding could already increase huge structural budget deficitnot reduce it.

The deficit can reach 30 billion dollars in the coming years — so large that the state is already struggling just to maintain the reduced level of care under HR1, let alone pay the federal government’s share.

Filling the Medi-Cal cuts would make the gap even bigger, said Keeley Martin Bosler, a former state finance director with more than two decades of experience in state fiscal policy. To “maintain the same level of insurance coverage, these costs are in addition to existing deficits and would be significant.”

California, which is projecting a deficit for the fourth year in a row, is likely to see larger deficits in coming years as spending continues to outpace revenue. Even if the state spends nothing to make up for the federal cuts, the deficit could reach $22 billion in the 2027-28 fiscal year, according to Gov. Gavin Newsom’s January budget proposal.

Democratic lawmakers, who already slashed some Medi-Cal benefits and froze new enrollment of undocumented adults last year, to close $12 billion budget holerecognize that the state must now combine sustained revenue increases with ongoing program cuts to address the significant deficit, as recommended by the nonpartisan Legislative Analyst’s Office.

Yet significant revenue increases are unlikely to materialize this year.

Newsom, in his final year as governor, has opposed any wealth tax over concerns that it would drive high-income earners out of California and reduce 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,” the chairman of the Senate Revenue and Taxation Committee said Jerry McNerneyDemocrat of Stockton. “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 approximately 50 cents of every dollar in surplus general fund revenue to 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 two tax proposals, including one that would shutdown a hatch at the water’s edgewhich allows multinational corporations that choose to pay taxes only on income made within California’s borders. This allows companies to set up subsidiaries abroad to avoid paying taxes on their profits, said the author of the law MP Damon Connellya Democrat from San Rafael.

Connolly told CalMatters his bill would raise $3 billion to $4 billion annually. But revenue may fluctuate and corporations may still find new ways to cut their taxes in California, according to one LAO assessment of different tax options.

Acknowledging the sum would not cover the entire structural deficit, Connolly said it was a “step in the right direction”.

“That’s only one part of the equation. It’s certainly time to look at potential revenue solutions, but we also obviously have to roll up our sleeves and take a hard look at the budget,” Connolly said. He did not specify which areas he would consider making cuts, saying only that health care protections are where state lawmakers should “draw the line.”

Another account by the chairman of the parliamentary health committee Oh my godD-Oakland, would require businesses whose workers rely on Medi-Cal and food stamps to contribute to a fund to “prevent loss or restore” health coverage under HR1. No details yet on how much the fee will be.

And that’s it California Billionaire Tax Act of 2026 proposed by SEIU-United Healthcare Workers West, which would apply a 5% one-time tax on the wealth of billionaires and use most of the revenue to fill federal health care cuts. The initiative would create a special fund that would release revenue from constitutionally required education and savings deposits.

Supporters estimate it would generate $100 billion over five years. SEIU-UHW spokeswoman Suzanne Jimenez told CalMatters 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 maintain it.

But even if voters approve the tax measure, critics say the funds could be blocked in court by lawsuits from billionaire taxpayers or by education groups that might argue it circumvents state constitutional requirements to benefit schools. And it’s unclear how the state will sustain the funding once the money runs out: LAO analysis estimates that the measure could drive away billionaires and reduce the income tax revenue the state can collect in the coming years.

“The first step is to pass the billionaire tax so we have five years to work on this plan. And then, right after Election Day, we’ll be ready to work with the next governor to find a long-term solution,” Jimenez said.

Taxing the madness of the rich faces an uphill battle

While they may do little to address the state’s structural deficit, the proposals to tax the wealthy subtly tap into public concern 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 targeting the rich is understandable, but I don’t think it’s really the kind of policy that can be expected to deal with the very long-term structural fiscal imbalance in a lasting way,” he said.

More than 60 percent of likely California voters support higher taxes on the state’s wealthiest to help with the state’s budget deficit, according to February survey from the Public Policy Institute of California.

The sentiment resonates especially with progressives who have made fighting income inequality a core belief. But even the popular idea faces an uphill climb: Some Democrats argue that raising taxes on the state’s top earners risks alienating them, especially since the state relies heavily on their income tax.

“The wealthiest Californians are also the most mobile Californians,” said former Assembly Budget Chairman Phil Ting, D-San Francisco. “They could easily decide to live in some other parts of the country.”

It could also prevent businesses and billionaires from moving to California. “Does this signal that California is not a friendly, accommodating jurisdiction for people who want to amass billions and billions of dollars of wealth?” Stark said.

Other ideas to address state budget needs more systematically could create even greater political risks, especially as state revenues flourish thanks to an AI-driven economy.

Stark said the state needs to examine its three main sources of revenue: income tax, sales tax and property tax. Because an income tax can reduce the incentive to work and a sales tax can discourage consumption, the state property tax — capped at 1 percent of property value since Proposition 13 in 1978 — “is jumping out as the tax reform that needs to happen in California,” he said.

“Not something that’s just going to be a one-time hit on the elite, but a fundamental, structural overhaul of the way the state of California taxes the value of land and structures.”

But any proposal to reform Prop. 13 is likely to spark a fierce political battle, just like a mix of ballot initiatives over the past half-century to amend Proposition 13 by removing tax breaks or loopholes to increase taxes.

It’s even harder now because affordability is top of mind for Californians, Ting said.

“People are very cost-sensitive because they think their groceries are going up, their gas is going up, their rent is going up, it’s a very difficult time to put even more costs into taxes for middle-class Californians.”

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.