As the deadline approaches, Gov. Gavin Newsom and Democrats in the state Legislature are working to resolve differences over access to public health care, delaying a minimum wage increase for workers and suspending tax credits for businesses. exemption because they cut California’s $45 tax credit.
The governor’s proposal would allocate $12.2 billion from the state’s emergency reserves to help close shortfalls over the next two years and reduce funding to combat climate change, provide broadband and increase subsidized child care, among dozens of other cuts.
Lawmakers responded last week by crafting their own plan that largely aligns with the governor’s strategy but reverses some of his proposals to reduce homelessness and fund housing. Democrats in the Legislature are calling for deep cuts to climate change programs and the state prison system.
Assembly Budget Chairman Jesse Gabriel (D-Encino) said the Legislature’s budget proposal restores “many of the most painful cuts to safety net programs, housing and health care” proposed by the governor, including higher fees for health care providers. Rate”. Lawmakers took aim at some of Newsom’s key plans, such as reducing funding for homeless encampments and funding to support behavioral health.
“These are hard choices,” Gabriel told a parliamentary budget hearing last week. “But we have to set priorities and develop an action plan because that’s what is needed at this moment.”
California’s deficit is largely due to lower-than-expected tax revenue, which Newsom described as a return to normal following an economic boom from the COVID-19 pandemic and billions of dollars in federal stimulus payments and business loans. Overspending due to poor revenue forecasts has also added to the state’s financial woes.
Legislative leaders and the governor’s staff held private negotiations last week in hopes of reaching a deal before the Legislature’s June 15 deadline to pass a state budget.
If lawmakers and the governor fail to reach a budget agreement in the coming days, the Senate and Assembly are expected to pass a preliminary budget next week. Lawmakers will then pass additional bills reflecting the agreement with the governor before the budget takes effect on July 1.
Here are some of the key differences they expect to address in the final budget deal:
Medi-Cal reimbursement rates increase
Newsom and lawmakers last June updated the tax on managed care organizations, known as the MCO tax. The tax applies to health insurance providers who charge a flat monthly fee for services, based on the number of people enrolled in the plan each month.
The tax is essentially a mechanism to allow California to raise billions of dollars in additional federal funding for Medi-Cal, California’s health care system for low-income residents, as Democrats expand eligibility to all income-eligible immigrants.
The law approved by Democrats last year extends the MCO tax through 2027 and directs some of the revenue to increase payment rates for doctors and other Medi-Cal providers, in some cases for the first time in two decades.
But Newsom’s budget proposal repurposes the money, spending $6.7 billion over multiple years to raise rates for health care providers and using the money to cover general Medi-Cal costs. Through tax adjustments, Newsom’s reforms could generate a total of $9.7 billion to support the Medi-Cal program, subject to federal approval.
The governor’s proposal has frustrated doctors and other health care providers who have argued for years that the state’s reimbursement rates for services to Medi-Cal patients were too low to sustain the practice. They say low reimbursement rates have left the state system starved of providers, leaving California’s most vulnerable without access to care. Doctors are leading the charge to pass a measure on the 2024 ballot that would make the MCO tax permanent and use some of the revenue to increase reimbursement rates for medical providers.
The budget plan proposed by legislative Democrats rejects Newsom’s plan to cancel more than $2.4 billion in provider rate increases scheduled to take effect on January 1, 2025.
The California Medical Association, one of the coalition opposing both proposals, said the governor and lawmakers “have a generational opportunity to achieve true equity in health care.”
“Too many families are unable to get the care they need because we refuse to properly fund Medi-Cal,” said CMA Executive Dustin Corcoran. “The state is adding millions of new patients to Medi-Cal, and this funding will Making sure we have medical providers to take care of them.”
Raise the minimum wage for health care workers—or not
Newsom signed legislation in October to raise the minimum wage for health care workers to $25 an hour. Unions celebrated the hard-won wage rise, which will mainly benefit workers not directly involved in providing care.
At the time, no one, including the governor, publicly mentioned a major warning he had privately made before agreeing to sign the bill: If state revenues ended up being as dismal as predicted, there was “simply no way” he would make the law complied with. It is scheduled to take effect in June.
Weeks after signing the bill, Newsom began calling for reforms to reduce funding for pay raises as the budget deficit grows. Negotiations between the government, unions and the healthcare industry have been going on privately for months without any resolution.
The governor has since made clear his concerns about the plan’s price tag, which was initially set at $2 billion from the state’s general fund, with another $2 billion paid for in federal funds in the first year. Other estimates suggest the government has overestimated the cost, possibly closer to $300 million.
Newsom did not provide funding for the wage increase in his May budget proposal as negotiations with labor continue. Democratic lawmakers, lining up with unions, want a $100 million pay raise in 2024-25, rising to $300 million in the third year of implementation.
How difficult is it to do business?
In the early stages of the pandemic, Newsom and lawmakers paused the ability of businesses with more than $1 million in revenue to deduct net operating losses from their tax bills and limited the state’s corporate tax credits to one per year in 2020 and 2021. Filer $5 million and 2022.
The changes are intended to temporarily boost state tax revenue during a chaotic time, when the pandemic has caused economic uncertainty across the country and California is expected to see huge revenue losses.
Newsom restored deductions and ended tax limits a year early in 2022, when the state projected a huge budget surplus. Now, as California faces deficits, he wants to pause and limit the tax deduction again for the 2025, 2026 and 2027 tax years, and restore the credit when incomes improve.
Lawmakers agreed with the governor’s plan but sought to implement the changes a year earlier. Implementing the tax credit adjustments in 2024 allows the Legislature to reduce cuts to other programs in the budget plan, saving more than $3 billion by 2026.
Loren Kaye, president of the California Business and Education Foundation, a think tank affiliated with the California Chamber of Commerce, said companies will incorporate these points into future business plans, and the sudden loss of these savings may force them to reduce the size of their staff or inventory to cover the cost of an unexpected tax bill.
“In this case, the Legislature made it worse because at least the governor’s proposal gives you some perspective because it starts with the 2025 tax year,” Kay said.
The restriction marks the second time in five years that the state has restricted tax credits, which could curb generous research and development or film credits for companies doing business in California, Kay said.
“We’re all about innovation,” Kay said. “This is one of our great competitive advantages and it can be heartbreaking to see people think we don’t support innovation as much as we have historically.”
Photographing Newsom’s Project
The Legislature’s proposal highlights key differences between the governor and lawmakers in his own party over funding some of his key policies, including homelessness and prison reform.
Lawmakers proposed another $1 billion in cuts to the Department of Corrections and Rehabilitation, including at least $12 million in cuts to the governor’s San Quentin Rehabilitation Program. Newsom’s cuts include $80.6 million in newly announced savings from decommissioning 46 housing units at 13 state prisons.
Democrats in the Legislature also want to spend $1 billion more than the governor to provide a sixth round of Homeless Housing, Assistance and Prevention grants to local governments to combat the homelessness crisis. Meanwhile, lawmakers proposed cutting $100 million in funding for homeless encampment cleanups this budget year.
