California is grappling with soaring Medi-Cal costs as Gov. Gavin Newsom and Democratic lawmakers back a revised health plan tax following new federal restrictions. Critics warn that the proposal could shift more of the financial burden onto privately insured Californians.

The proposal would increase the levy on private health plans beginning in 2027 if federal officials approve it. Health insurers and doctors have formed an unlikely coalition against the plan, warning that it could make an already expensive state even costlier.

California is seeking to preserve billions of dollars in Medi-Cal financing after Washington tightened rules governing health plan taxes used to secure federal matching funds. Providing health care to illegal immigrants cost California an estimated $12.4 billion in 2025, according to the Associated Press.

Brian Blase, president of the right of center Paragon Health Institute, was asked whether expanding coverage to illegal immigrants created a need for California to raise taxes. His answer was a firm “yes.”

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"The One Big Beautiful Bill Act limited California's ability to target the tax just on Medicaid insurers, so California is proposing to raise the health insurance tax on people that have private coverage ... the estimates are that would increase insurance for families by $400 a year," he told Fox News Digital. "That is just because California doesn't want to deal with its unsustainable spending ... there are many people on the program who are not eligible for the program, and that is not even accounting for the fact that California has expanded Medicaid to all unauthorized immigrants in the state."

Federal changes will prevent California from continuing its existing health plan tax structure after 2026. That has forced state officials to redesign a financing mechanism that has generated billions of dollars for Medi-Cal.

The California Medical Association and California Association of Health Plans are suing to block the increase. Their lawsuit does not challenge the tax because it benefits illegal immigrants, but instead alleges that the measure violates voter-approved limits and restrictions on how the resulting revenue may be spent.

The alliance is particularly notable because doctors and insurance companies often stand on opposite sides of health care disputes. This time, both groups are challenging Newsom’s effort to keep the Medi-Cal financing flowing by placing additional costs on private plans.

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Proposition 35 limits how much California can tax commercial health plan enrollment. The initiative constrains the state as it seeks to comply with federal rules governing the much higher tax previously imposed on Medi-Cal enrollment, and California voters approved it with overwhelming support.

"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," California Medical Association CEO Dustin Corcoran said in a statement.

Health insurers estimate that the revised tax could increase costs by approximately $100 per person each year. A family of four could therefore pay an additional $400 annually through higher premiums, on top of ordinary rate increases.

Newsom spokeswoman Tara Gallegos said the governor maintains that Proposition 35 does not make the tax increase illegal. "The state disagrees with their claims, and we believe the courts will too," she told Fox News Digital about the lawsuit.

H.D. Palmer, deputy director for external affairs at the California Department of Finance, said the new tax measure was designed to comply with the One Big Beautiful Bill Act. He said the state is submitting a proposal with two tracks because the existing tax system may conflict with the federal law.

One track resembles the state’s current taxing system but could run afoul of federal requirements. The second would conform to the One Big Beautiful Bill Act by shifting costs toward private health plans.

"If the federal government declines to approve the tax that is structured similar to the existing [health plan tax], Proposition 35 may then sunset per current law," Palmer added.

The tax fight arrives as California continues losing residents and businesses, with living costs among the chief reasons people cite for leaving. One analysis found that nearly 10 million people moved from California to other states between 2010 and 2024, while just over 7 million moved into California from elsewhere in the country.

That exodus has raised concerns about California’s financial outlook. The departure of higher-income residents could reduce revenue for a state heavily dependent on income taxes, even as Sacramento searches for ways to sustain billions of dollars in Medi-Cal financing.

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