Dan Walters: Shell Game On Taxes Must Stop

For years, the state has conducted something of a shell game to help finance Medi-Cal, its health insurance system for the poor that now covers nearly a third of Californians.

California imposed a special tax on “managed care organizations” that handle Medi-Cal recipients and used it to qualify for additional federal funds. The insurers got back all of their tax money and then some, and the state general fund gained additional money for other uses.

Finally, however, the feds told California and other states to stop playing the game and decreed that any tax aimed at drawing down additional federal medical care funds had to be broader than just those benefiting from the exchange.

That decree creates, Gov. Jerry Brown’s administration says, a potential $1.1 billion hole for the 2016-17 budget and beyond, and he has proposed to replace the “MCO tax,” as it’s dubbed, with a new levy.

Initially, it was to be a multi-tiered tax that would be calculated on all managed care patients, not just those enrolled in Medi-Cal, but the insurers balked, saying taxing private enrollees would be unfair and could make their premiums unaffordably high.

But that was just one problem that Brown faced. The most recent version of the tax was adopted in 2013, when Democrats had supermajorities in both legislative houses and thus were able to pass taxes without any Republican votes.

The supermajorities are history and Republicans have been unwilling to entertain any targeted tax increases Brown seeks for either medical care or highway repairs.

Just before the Legislature adjourned in September, Brown offered a modified MCO tax, reducing the hit on non-Medi-Cal patients, but failed to gain insurers’ support or crack the GOP opposition. In response, Brown vetoed 25 health care bills and has indicated that he will propose a budget in January that makes sharp Medi-Cal service cuts.

However, there’s another fly in the ointment. The Legislature’s budget analyst, Mac Taylor, has projected that state revenue will be $3 billion above estimates in the current fiscal year and reserves could top $11 billion by 2017.

That projection stiffens Republican opposition to raising any taxes and raises the question of whether the MCO tax is even needed since the supposed hole in Medi-Cal financing could be easily filled with a fraction of the extra money pouring into the state treasury.

During a hearing on the issue in Los Angeles on Tuesday, Senate Health Committee Chairman Ed Hernandez, D-Azusa, criticized Brown’s Department of Finance for not “being here to explain why the tax is still necessary,” given sharp gains in state revenue.

He and other legislators then listened to a parade of witnesses who complained about the inadequacy of Medi-Cal services.

It’s another illustration of how the upsurge in state revenue creates its own set of difficult issues for a governor bent on lowering spending expectations and building reserves against a future economic downturn.