Entrepreneurs did not come to California for an easy life. They came to build something – a corner restaurant, a neighborhood grocery, a trucking company, a hair salon, a construction crew. They hire their neighbors and reinvest in their blocks. And many of them, at real personal sacrifice, do something the law does not even require of a small employer: they provide health coverage to the people who work for them.
So it is hard to understand why, at the precise moment these businesses are squeezed hardest, Governor Newsom is preparing to make that coverage dramatically more expensive and as a result, make it that much more expensive to run a business in California.
The governor’s budget proposes a steep increase, estimated $1.5 billion annually, or several hundred more per year for a family, in the state’s tax on commercial health insurance – the coverage working families and the businesses that employ them rely on.
Let us be clear about what a tax on health plans actually is. It is not absorbed by faceless insurers. It is passed straight through to the people who pay the premiums: employees buying their own coverage, families on the individual market, and the small businesses that cover their workforce. A new tax on coverage is, in plain terms, a premium hike with a government stamp on it.
The timing could hardly be worse. Healthcare costs are already climbing because of federal cuts to the Affordable Care Act, and many families in our communities have already lost coverage or watched their premiums rise. Small and family-owned businesses operate on some of the thinnest margins in the state economy, and they are being asked to absorb yet another cost increase on top of inflation, rent, and wages.
When a small employer’s premiums jump, the choices are brutal and familiar: drop coverage, cut hours, freeze hiring, or raise prices on the customers who can least afford it. None of those outcomes makes anyone healthier. They simply move the pain downstream to the workers this proposal claims to protect.
What makes it especially troubling is where the money would go. This proposal redirects healthcare-related revenue to close the state’s deficit. Californians would pay more and get nothing in return — no better access, no lower costs. Just a bigger bill.
And here is the part the governor should weigh most carefully: this proposal may not even be legal. Proposition 35, the measure California voters approved overwhelmingly in 2024, set a cap on commercial plans of $2.50 to shield Californians from large premium increases, and dedicated the revenue to health care specifically to stop the state from raiding it. The governor’s proposal would push that to roughly $8.85 — more than triple what voters signed off on – and diverts the money to fill the self-created deficit.
A measure that runs directly counter to the text and intent of a voter-approved initiative is an invitation to litigation — and if the courts agree it exceeds what Proposition 35 permits, the state could end up in costly legal fights with the revenue tied up, having forced Californians to pay higher premiums for a plan that collapsed in court.
We are not pretending the state’s budget challenges are imaginary, or that California should stop fighting the federal policies driving up healthcare costs. But a deficit that belongs to the whole state should not be solved by quietly taxing the coverage of working families and the small businesses that provide it.
There are better paths. California can keep the existing, smaller MCO tax structure — a model that worked for years precisely because it raised funds without hammering consumers. It can pursue broad budget solutions that spread responsibility fairly rather than singling out one of the most fragile sectors of our economy. And it can keep healthcare revenue dedicated to its intended purpose: patient care.
We are asking Governor Newsom and the Legislature to drop this tax increase, protect the coverage working families and small business owners have fought to keep, and respect the promise voters made at the ballot box.
California’s small businesses are not a budget loophole. They are the engine of the very communities the governor says he wants to lift up. It is time Sacramento started treating them that way.
Michael Hedges is the president of the California Small Business Association and small business owner in Southern California.