Senate Standing Committee on Budget and Fiscal Review

The Senate Committee on Budget and Fiscal Review will come to order. We are a subcommittee. There's five of us here, so as soon as we can get to ten, we will call a quorum. I want to acknowledge that there's simultaneous committee hearings going on.

Many members of the Budget Committee are members of. So there will be people coming in and out of the hearing. We're holding our committee hearing here at 1021 O Street, Room 1200. Public comment will be heard after all the discussion items have been presented. Today, we will hear Assembly Bills 110, 122, 125, and 177.

While we passed AB 109, our budget bill, on Monday, we now take up the trailer bills that represent revenue changes assumed in those bills. On ABs 110, 122, and 125, we have reached an agreement with the administration and the Assembly, and the Assembly passed these bills on Monday night. On AB 177, the Senate continues to prioritize making progress toward a Fair Share from Big Corporations Act.

This does not turn on the contribution and does not generate revenue at this point, but it does create the Fair Share from Big Corporations Act to begin holding companies accountable for the taxpayers' cost of providing health care to their employees. Under this bill, the administration will be required to present fully developed options to the legislature to be considered during next year's budget process.

The bill is part of the two-party agreement and will be part of the final negotiations with the administration. I also want to note that the Senate led the call for new revenues to address our structural deficit, and doing this as part of a balanced approach, which was to make cuts as well and hold revenue from this year for the year after next, so that the structural deficit would be cut roughly in half and the budget would be balanced for two years.

While these revenues were not our first choice, we appreciate the administration and the Assembly going from $0 in new revenue to joining the Senate's call for over $5,000,000,000 in ongoing revenues. We understand that there are some of the potential impacts on healthcare premiums from the new MCO tax, but let it be clear, this bill is only needed because President Donald Trump wiped out California's prior MCO tax that protected premiums.

So the best way to protect premiums is for the federal government to reverse course and allow our prior MCO structure to return.

In the meantime, this revenue package allows the state to prevent some of the most devastating reductions to health care and social services and delay the implementation of others. The revenue package also allows for continued investments in education, childcare, affordable housing, homelessness reduction, and many other items that are important to Californians. Today, our process will be: we are going to hear on the four items on the agenda and then we are going to bring it back to the committee for questions or comments on all four together.

So we will hear the four and then do that. And then after hearing the bills, we'll have a public comment prior to voting. So before we begin, Vice Chair Niello, do you have any opening comments?

Thank you very much, Mr. Chair. Not surprisingly, we have some fundamentally differing views on the nature of the challenge that we face with a structural deficit that appears because of not declining revenues, which is typically what happens. We hit a recession and we have declining revenues and a mismatch between revenues and expenditures. But increasing revenues rather strong but more increasing expenditures. And so to solve an increasing revenue challenge with increasing revenue even further just kind of doesn't make sense.

But go ahead and tax the labor on custom software development. And while you're at it, not to offer any creative suggestion because it's maybe already being considered, why not tax labor on a complete rebuild of an air conditioning unit? It becomes a product at that point. Why not tax that labor? Why not tax the labor on replacing a roof?

When it's completely replaced, it's a whole new product. Why not tax that labor? I hate to offer suggestions, but I'm concerned that the logic could go in that direction. And so go ahead and tax a limitation of research and development credits. I mean, after all, our economy is fundamentally an innovative economy.

The strength of our economy is the tech sector, and that is an innovative economy that requires and survives on continuing research and development. So by all means, limit that. And we will see unintended, from my standpoint and undesirable anyway, results with regard to that. And with regard to the MCO tax, go ahead and increase the cost of healthcare by that amount to individuals on the commercial side. And just a point with regard to the so-called Fair Share.

I indicated my concern about that phrase a couple of days ago. But maybe as part of that, we could also take a look at the impact that we're having on the healthcare industry by virtue of woefully under-reimbursing procedures, particularly with regard to Medi-Cal. And while you're at it, continue to ignore my recommendation that we do some fundamental assessment of ongoing existing spending programs to see where we can bring those increasing costs in line with the increasing revenues without raising taxes.

So I look forward to a healthy discussion about this and, on with the show.

Thank you, Senator. We had a quorum and Senator Grove walked out. So see if she's in the hallway. Perfect. Would you please call the roll for purposes of establishing a quorum?

[Roll Call]

Thank you. We have established a quorum. Thank you, members, for that. So, we are going to now begin with Erica Lee from the Department of Finance for a brief overview of the bills in front of us. And then we'll have Carolyn Chu from the Legislative Analyst.

And I think we could do this either way. But why don't we just go through each one individually, go to Finance and then LAO and work our way through the four. And then we'll bring it back to the members for questions and comments. So Ms. Lee, welcome to the committee.

Good morning, Chair Laird, Vice Chair Niello, members of the committee. Erica Lee with the Department of Finance, here again this week to present several trailer bills that together are part of the architecture of the legislature's budget. And I will begin with AB 110. AB 110 is a budget bill junior that amends the 2026 Budget Act to identify budget-related legislation. Moving on to AB 122.

This is a trailer bill on revenues. Beginning 01/01/2027, this bill extends the application of the state's existing sales tax on prewritten software when it is brought in a physical medium like a disk to prewritten software that is delivered electronically or accessed remotely. I would note that this modest expansion of the sales tax base aligns California's tax system more closely with most other states, and better reflects changes to modern purchasing patterns since California last updated its software tax laws in the seventies.

The bill also extends the temporary $5,000,000 business tax credit limitation that is currently in place for tax years 2024 through 2026 for an additional three years. So 2027 through 2029, including its refundability provisions that will allow impacted taxpayers to fully claim those credits in future years.

It then permanently limits business tax credit use to the greater of either $5,000,000 or 70% of a company's tax liability beginning in 2030, ensuring that large profitable corporations doing business in California pay a reasonable minimum level of corporation tax in the state. This bill also reduces the annual tax from $800 to $400 for tax years '27, '28, and '29 for limited liability companies, limited liability partnerships, and limited partnerships in their first year of operation.

And lastly, this bill establishes a new tax of 100% on federal settlements paid out of the federal anti-weaponization fund.

Thank you. And do you have any comments on the first two? No.

Good morning, Chair and members. Carolyn Chu from the Legislative Analyst's Office. We're here and happy to answer questions.

Great. Thank you. Then we'll move to the third one.

Sure. AB 125 authorizes a renewed managed care organization, or MCO, tax for three years beginning 01/01/2027 that conforms with new stringent federal requirements in HR 1. Revenues from the tax will support the Medi-Cal program and maintain targeted rate increases for primary, maternal, and non-specialty mental health care implemented in 2024.

The proposals, as mentioned, AB 122 and AB 125 were included in the governor's budget with that modification to the tax credit limit proposal, as I mentioned, and to which the administration is supportive. Should we go on to AB 177?

That'd be great.

Okay. Finally, AB 177 is a bill that requires the Department of Finance to present to the legislature options assessing large corporations for the cost of their employees that are enrolled in Medi-Cal on or before 03/01/2027. At least one option must include an employer-paid premium to offset the state cost for their employees who receive Medi-Cal for companies with at least 250 employees. All options must include proposed statutory changes, specified data, and analysis of costs and timelines.

And then the bill also appropriates $1,000 general fund for the Department of Finance to implement these requirements.

And it becomes inoperative if HR 1 is repealed prior to implementation. And that's the end of my presentation.

Thank you. And do you have any comments on the other two bills? Okay. Then, having heard a presentation on each of the four bills, we'll bring the matter back to the committee where we can have questions or comments on any of the four bills. And let me, Senator, just a second.

Let me see who else, but I have Senator Durazo. Anybody else? Senator McNerney? Senator Smallwood-Cuevas. And what I'm going to do is move Senator Smallwood-Cuevas in front of Senator McNerney because Senator Durazo and Smallwood-Cuevas have other committees they're chairing that begin at 09:30.

And then Cabaldon, anybody else want to get on the list? Grove and Seyarto.

Mr. Chair, just to clarify, we are commenting on all the bills or there's more presentation?

Let me just finish. Anybody else? Senator Menjivar. And just to repeat, questions or comments can be on any of the four bills. We just heard a presentation on each and we're combining the comments.

Or questions into one. And then when we are done with the committee comments, we will go to public testimony. And after public testimony, we will take votes. So let's begin with Senator Durazo.

Thank you, Mr. Chair. Good morning. I have a question on AB 125. How are the funds prioritized within the Medi-Cal stability fund framework?

Good morning, Mr. Chair and members of the committee. Aaron Edwards with the Department of Finance. So the way that the funds would be prioritized is, first, the, there would be about $300,000,000 allocated to support targeted rate increases that became effective, January 1, 2024. And those are related to, specialty, non specialty mental health, primary care, and maternity care services.

In addition to that, the remaining roughly $2,000,000,000 in annual revenues would be allocated to support the Medi Cal program.

2,000,000,000? Yes. Okay. Okay. Great.

Thank you. Yeah. I I am I I support the bill because it does help to stabilize and I think that's really important. We still have the issue, of course, of resolving the freeze for, the medical. On another on AB 177, I mean, we're still subsidizing the billion dollar corporations and this is a good tool to have in our in our box.

So I support the tools that we have but understand that we need more tools. If I'm supporting the bills because they protect the floor, but I wanna be clear. We need to move beyond the the floor because over a million hardworking Californians are still frozen out of coverage. And the corporations receiving these, huge tax cuts from HR 1 should not be able to pay poverty wages and then hand the health care bill to California taxpayers.

So I'm I'm supporting our vote yes I am voting yes today because I believe in the direction that this is going in.

But we need to see a serious proposal in in March not merely a a placeholder. So, I don't know if you have any comments on that but those are my comments and questions. Thank you mister chair.

Thank you very much. We're going to go to Senator Smallwood Cuevas.

Thank you mister chair. I wanted to raise a couple questions about SB 122. And just making sure we are understanding tax credits are basically discounts that reduce the amount of taxes a company owes. And these can sometimes result in companies owing nothing or even being refunded cash after paying no taxes. And some of the refundable tax credit options.

So I guess my question on this is, you know, what safeguards are in place to prevent large corporations from restructuring, shifting liability, or exploiting loopholes in ways that it would undermine the intent of this proposal?

Good morning. Colby White, Department of Finance. There are long standing rules under the corporate tax law. Some of them include, for example, companies have to report as a combined entity so they can't shift shift profits into into different entities. So there's there's there's things like that.

The state or the the state enacted single sales factor apportionment in 2012 and didn't enact it. Sorry. It was about the voters approved it. And so that that deals with how states, multi state corporations apportion profits to California, and they now have to do it based on based on their sales in California versus their sales throughout throughout the country or or throughout the country on the water sandwich basis.

So so there's different, you know, there's long standing law laws throughout throughout the corporate tax law that that the franchise tax board enforces in order to ensure that corporations do do pay tax.

And when when we were talking about the credit limitations specifically, we do see that the corporations report liability on their on their returns. And so this this proposal before you today, that it it has two parts. One of it one is related to the the temporary extension of the existing where the credits are limited to $5,000,000 per year, and then after that they're they're still limited to or they can take up to 5,000,000.

And then after that, they can claim up to 70% of their liability, but that 30% will represent a true a true ability for for larger corporations to have to pay some minimum reasonable level of tax in California.

And so in the the framework that you just presented, when we think about the revenue that gets generated from, this proposal, how much or any sense of what, percentage part of this revenue will go toward protecting Californians who may be, frozen or fallen off of medical or snap.

Well, this is I mean this is general fund revenue. So it's part of the it's part of the entire budget architecture and, and it it helps, you know, it it it builds out the whole it's it's a piece of the puzzle to build out the entire budget architecture to to address all the different competing priorities of the state.

But it's meant to raise significant revenues and is there any earmark intentional investment that is targeted toward Medi Cal as a result of these revenues specifically and directly? Not as part of the whole general fund but in terms of addressing the reality that 1.3 to 3,000,000 in terms of estimates of Californians, many of them working Californians who may lose their coverage. Is any of this revenue targeted specifically to that? None of the, revenue is specifically earmarked in in in regards to

the revenue that is coming in for this proposal. It is, as, my colleague mentioned, allows for more revenue and, allows for the administration legislature to have some flexibility in how they're building the budget overall and prioritizing programs. And of course, we as administration, as a state have prioritized certain things in our budget and freeing up some additional revenue allows us to have the flexibility in the future to make decisions in regards to how we build the budget.

And when you say make decisions in the future, is there a language that speaks specifically to that as it relates to Medi Cal in this proposal?

There's nothing specific to supporting the Medi Cal program aside from the fact that the entire budget and the framework for the budget is there to allow for the continuation of party programs including all of our health and safe safety net programs.

Yeah. I'm I'm aware that, you know, nearly more than half, nearly two thirds of our budget goes toward health and human services including medical. I think it's 289,000,000,000 or so of our, expenses go toward health and human services and and Medi Cal being a significant part of that.

So that's why I'm asking the question about how are we thinking about targeting resources, revenues to address what is going to be an increase in those costs as we're looking at folks losing care, having to not get preventative care, having illness accelerate in a way that it becomes expensive and ultimately deadly and then showing up in emergency rooms which then cost our system so much more.

So that's why in in terms of how do you prevent that scenario, my question was is there some intentionality around the investment in these funds?

And it it seems like the answer is no on that. On on item 3, SB 125, the MCO tax. And I really appreciate all of the the work that the administration has done in in in trying to save our proposition 35 efforts, and the the will of the people in the state of California. We see this as an opportunity for additional resources. And, but we also know that this administration has made it very difficult for us to to make good on that that commitment.

On on SB 125, does the proposal still deliver on what voters intended? And can you talk a little bit about how there are assurances that we, that that future action by the Trump administration will allow these changes to move forward. And, you know, once again, you know, that we are not further disrupting California efforts to provide and fund Medi Cal for for for the people of California who depend on it.

Aaron Edwards once again with Department of Finance. Appreciate the question. I'll, take the the first question about the, you know, whether our proposal upholds what the voters are trying to accomplish in approving prop 35. The world has changed I think pretty significantly from when the voters approved proposition 35 in 2024. The big change of course was HR 1 passed in in 2000 '25.

And what that bill did is it essentially limited the state's ability to apply disproportionate taxes on medical plans relative to commercial plans. And the interaction of HR 1 with prop 35 which capped the tax revenue that could be collected from commercial plans essentially means that the state cannot move forward in the way that I think the voters probably intended when Prop 35 was passed. So our proposal we think conform it conforms with the law as written under Prop 35.

That law requires the state to submit a tax that's substantially similar to the tax proven under Prop 35 which we intend to do. We recognize that the Federal Government may not choose to approve that tax because it is disproportionate.

Because it places higher taxes on medical plans and commercial plans. So we also intend to submit a request to the Federal Government for a a tax that that would comply with prop 35 that, I'm sorry, with HR 1 that is proportionate and that levels the same tax across medical and commercial plans. In that event, the proceeds from that tax would not be subject to prop 35.

Prop 35 provides that if the state cannot get approval for a tax that's substantially similar, then prop 35 essentially sunsets and winds down. And so that is our approach.

We believe that it is consistent with with prop 35 and reflects the new reality that we live in post post HR 1. So hopefully that addresses your first question. In terms of your second question, could you actually remind me what the second question was?

So my my second question is is there is there a sense of these resources being able to come back to help fill some of the gaps that we have in our medical system?

Absolutely. Our intent is to use these revenues to support the medical program. As I indicated in response to, Senator Durazo's question, previously. We we allocate $300,000,000 from the revenues to support specifically targeted rate increases, for non non specialty, mental health care, primary care, and maternity care that were, previously approved in 2024. And then the, remaining $2,000,000,000 is to generally support the Medi Cal program, which will allow us to stave off making further reductions to what we believe is is really a critical social safety net program.

So so these dollars are for future reductions not actually addressing the folks who are currently at risk or who have been frozen out of access to care. But for future reductions.

That that's correct. This this revenue would allow us to to avoid making further reductions to the medical program.

Well, I I think this is, just raise brings me to the final point around, around 177 and, you know, the Californians most harmed by this current budget, between the cuts and the delays, you know, are many sectors of our most vulnerable populations. Working poor families, children, our seniors, people with chronic illness who now will not be able to get that continuous care. Communities of color, in my district, 48% of my constituents are on Medi Cal.

And this these cuts are gonna create severe suffering in in those those communities. And and I understand future cuts may be protected, but it's the current ones, that are going to hurt and we're going to see those those effects.

And so, you know, when we're we're talking about, you know, whether it's grocery workers who are fighting cancer or warehouse workers who are trying to manage their chronic illness or seniors choosing between medication and their their rent. This is a it's this is an incredibly difficult situation. And the health care sector is one of the few places that is helping to boost California's economy. It's helping to maintain our workforce. It's helping to keep, so many of our, our industries thriving.

And this hit to Medi Cal is going to have implications on the public safety side and on the economic, ecosystem of of California. So I I believe and agree. I saw there was a a letter sent, by UDW local thirty ninety that we just received that says it encourages the legislature to adopt the Medi Cal fair share regardless of any federal actions affecting Medicaid.

Large employers should contribute their fair share toward health care system and not rely on taxpayers to subsidize the health care costs of their workforce. It seems to me this is an all hands on deck moment.

It's a moment where we're watching a domino fall and we know, anyone who's lived through the late nineties and through the 2000 that when communities start to lose whole swaths of the safety net, it triggers a level of desperation, and negative implications for so many things, in our communities. California is a beacon. We are and have been leading in many ways against this administration. We've shown that investing in safetyness, providing medical for all, for example.

Just one example of the ways we've shown that when we invest in people, we are able to sustain our communities.

We're able to keep folks insured and healthy. We've seen the lowest crime rates that we have experienced in decades. We've seen our economy grow from the fifth to the fourth largest economy because we made investments, because we did the work, to fortify and expand our safety net. The contracting will create a domino on the opposite effect. And the way we stay in front of that is to have the courageous conversations of bringing everyone to the table to invest in that safety net, today.

So, I think AB 177 is fundamental. It's fundamental to, helping to weather this HR 1 nightmare.

And at the same time, it creates some accountability and shared responsibility and recognizing that when public dollars are helping to cover health care costs for employees, for some of the largest and wealthiest corporations in the world, most profitable in the world, There is a responsibility for those corporations to fund the health care of their workers and not shift that cost to Californians who are already hurting, who are already in an affordability crisis. This is not about punishing success. It's about shared responsibility.

And California has not been afraid to stand up and to do the courageous things that allow our state to advance and grow. This is a moment where we have to do the same as we are facing some of the darkest, moments for many in our communities where it is literally going to be life and death. So with that, Aye, thank you for your time, Mr.

Chair and, I hope the administration does, the important thing of coming to the table on this question of 177, and help us to protect California as we weather these next couple of very dangerous times.

Thank you very much, Senator. We're gonna go to Senator McNerney and Senator Cabaldon is on deck.

Well, first of all, I wanna thank the chair and the committee consultants, even the governor's office for working on this budget. I think it's important. We're gonna need to do it. But it's always hard for elected officials to raise revenues. It's always hard.

But SB 122, will improve the fairness of our sales tax system. California sales taxes were created during the Great Depression nearly a hundred years ago. It only applies to things like cars, clothing, food, which taxpayers of modest needs all need. But it doesn't apply to things like services, software, and other intangibles where where the wealthier taxpayers are more likely to purchase.

SB 122 modernizes our sales tax for the for twenty first century and ensures that the sales tax will continue to be a vital revenue source for both the state of California and local governments and that lower income Californians won't be the only ones to pay for it.

The bill also has an added benefit and I like this one a lot. Businesses can deduct sales taxes from federal income. So this is the tax that the Federal Government will help us pay for. SB 122 also make sure that the wealthiest companies do pay their fair share more than the minimum amount possible. The research and development credit is an important tool for innovation in California.

It's a good thing. But when this legislature enacted the credit in 1987, it could not have imagined that companies holding billions of stockpile credits that could wipe out their tax liabilities forever. That's kinda crazy. SB 122 strikes the right balance. Companies with credits limited in the next three years are made whole with refundable credits after a three year wait.

The permanent limitation that starts in 2030 only applies to those companies with more than $60,000,000 in California profit. And those companies can still use credits to offset 70% of their liability. Finally, I want to add that the cloud based software sales tax portion of this bill is a good first step toward fairness. But over the next year, I strongly believe that we should examine other current tax breaks that the tech industry no longer needs. And now I will yield back to the chair.

Thank you very much. We'll move to Senator Kibaldin and Senator Grove is on deck.

Thank you, mister chair. And I I wanna, pick up on all the points that the chair of the revenue and taxation committee, made as well. Because for me, the proposals that are before us, I think they are supportable simply on their merits. Not as revenue raisers. But they are simply modernizing our tax system and making some baseline fundamental equity considerations come into play.

So I appreciate the administration's work on these measures and the software sales tax, I mean, I mean, as I think most Californians know, if you if you or if if I if I buy Microsoft Excel and I ask for them to send me send me a disk and hope that my computer can still read it, I pay sales tax on it because it's a physical good. The exact same product if I say, let me I click download instead. There's no sales tax at all.

Now I'm not doing either one of those things anymore. This bill is largely gonna apply to business to business transactions, and and no one is.

None of those businesses are ordering discs anymore, either. So this is simply modernizing our tax collection system for software, to match what many, many, many other states have done with no none of the catastrophic consequences that have been foreshadowed in in in my in my esteemed colleague, Devisere's remarks. Texas does this, but Texas actually goes further. Texas taxes custom software. This measure does not propose to do that.

So it's not this is not a tax on labor. It's it's simply modernizing a taxation system that will allow to assure the companies that are that are purchasing prewritten software are paying the same share that whether it's still delivered digitally or not. So the the revenue is a is a is a is is a helpful given our budget situation, but this makes sense regardless.

And similarly, I mean, it is it is outrageous that there, you know, there are barbers in my district that are that are paying more an individual barber or a farm worker is paying more in taxes than Apple or or or or Google. I mean, that just makes no sense.

That's not defensible as a matter of public policy. And this governor has steadfastly insisted on not raising taxes during his entire term. And I know this proposal is coming from the administration not as not as a way to raise revenue, but because that's just not fair.

And, and and I appreciate the efforts that have been made by the administration and by by the leadership of our two houses to try to in working with industry to make sure we're not having unintended consequences on research and development in the state. But that fundamental proposition that in a democracy, in a free society, everyone has to pay something.

That doesn't work if that if that doesn't apply to the to the largest. And although I wasn't here, when the research and development credit was first adopted, it was a very different California. And, I think it it I continue to support the credit, but let's be real. That credit was was done when Cal the state of California was one of the biggest players in the world. We still are, but so are many of our companies now.

And it was our hope was to spur innovation across the entire economy, particularly with small businesses in a lot of different sectors that we were trying to establish a foothold in. It has in many ways worked to do that, but it is no longer the case that the the state of California with general fund revenues, you know, for quarter billion dollars plus or minus.

It makes no sense that we will be that with that that we should be, incentivizing companies that are worth 10 times us to continue doing research. If we didn't have this credit at all, would Nvidia continue to do research in how to how to make an even better chip? Faster and cheaper?

No. It's fundamental to their business model. So much of our economy because the tax credit has worked, has embedded R and D as fundamental lines of business for taxpayers like l like Alphabet, Nvidia and others that have so many unused tax credits that they are paying essentially net. They're paying $800 or whatever in the business license fee, dollars 800 on revenues that are more than us.

So it's a quaint artifact of history that we think the people of California need to be paying some of the largest tech firms in particular in order to do research, which is their fundamental line of business.

And and and so there there are important, research efforts that have been undertaken with these tax credits in in the life sciences and ag and many other places. So I'm I'm very supportive of the credit, but we it does need a 20 century look. And this effort by, and this proposal, that is being put forward by by the by the budget chair and the and the pro tem, I think begins that that effort simply to make sure everyone pays something.

And by something, I don't mean $800, but that that there's absolutely no basis for a teacher in my in my district to be paying far more in taxes and certainly as a share, but even just in dollars in taxes than Google or Apple or Nvidia or PayPal or Intuit are paying. And this proposal would would would would have to start to make that right by showing you at least have to pay 30% of your tax liability.

That seems that seems imminently imminently fair. And the changes that have been made in the in this proposal as opposed to the administration's proposal to try to deal with some of the concerns from from life sciences and other industries, I think are appropriate. Appreciate them, and, look forward to supporting the bill the these bills today. Thank you, mister chair.

Thank you very much. Now we're gonna move to Senator Grove and Senator Sciardo is on deck.

Thank you, mister chair. Thank you for, for starting the committee on time so that we could get our questions asked and, get out of here. I just have a series of questions. I'm gonna start with AB 177. What's the definition of an employer?

Anybody. I don't care who answers it.

For the purposes of the bill before you, I don't think that an employer is included the definition of the employer is included, except for the fact that the study is to examine, the potential options for employers that employ more than 250 employees. But I don't believe the bill extends beyond that particular designation.

So there's no definition employer. When you say 250 employees, are they full time or part time?

I don't believe the bill, defines that, but I'd have to go back and look.

Doesn't define it. Are they, supplemental income individuals, like somebody on social security, medical who's working at Walmart at a greeter to be just social in society? Is it a part time employee trying to get through college, working at Starbucks, or something else? Or is it, I mean, what's the definition of employee? Is there hours and how it qualifies?

Sure. I I understand sort of the the line of questioning that you're pursuing. As we understand the committee's intent, it's to direct the administration to examine options that would that would primary, to, impose, this type of penalty. And we would imagine that, as the administration develops, options, it would examine, how to, determine the types of businesses that would, be subject to the penalty.

And so as as far as I understand it, the bill is relatively silent on the specific parameters in order to enable the administration to look at different ways to design the penalty depending on what the data supports in terms of, the ability to impose such a penalty.

So based on what you said, this bill allows the administration to charge what 200 and how

much dollars? The bill itself does not, impose a tax. What's the intent? The intent of the bill is to direct the administration to present to the legislature by next spring options to impose a penalty on employers whose employees, utilize the Medi Cal program.

And what's that, what's that total what's that dollar? There was a 245 or a $285 figure per month per employee floated around.

I'm I'm not familiar with that specific, penalty level as I I believe the agenda speaks to the intent of raising, a few billion dollars in revenue, which would require, likely a a penalty in the hundreds of millions.

So this is a $100.

Just to

be clear that we're voting on today does not identify an employer who would be subject to a penalty for having their employees on medical. It doesn't have a identify or have a definition of an employee, whether that's a full time or part time or supplemental income employee. There's no definitions of an employer or an employee that would be subject to this penalty or this study, that we would allow the administration to take up next spring. Is that true?

I'm gonna interrupt

Oh, come on, mister chair. You didn't interrupt anybody else. I'm just trying to get the meat and potatoes of the thing.

Oh, I I get it. But this is a bill that's come from the legislature and they are answering questions about the bill that came from the legislature. And so I just wanna clarify that what if this bill's approved, it asked the administration to consider all those things and then come to the legislature and it doesn't trigger it. It doesn't even mean it's final. It just they are to consider it and present it.

So there are no specifics in the bill because it asked the administration to consider the specifics and what it would recommend to the legislature.

Okay. So there's no specifics in the bill to authorize the governor's office or the administration or the next administration. Well, the administration, I guess, to come forward and present information to this. Do you have to have a bill from as the administration as the governor of the state of California, do you have to have a bill that says, hey, I think we should look at employers and in higher taxes? You have to have a bill that says that?

Well, I'm from the legislative analyst office. But the administration does not require a bill to do studies. But often the legislature will direct through statute specific studies that it would like the administration to pursue.

Miss Lee, go ahead. Good morning.

Good morning. My my colleague is right. The administration does not require, a bill, for, proposing anything in, say, the governor's budget or the mayor vision, or something that could happen through an executive order. But this specific bill does require it would require the administration to to do just as was stated as and to look into the potential options of developing said plan and how to implement said plan.

Thank you. So just to be clear, my colleagues on the other side of the aisle are introducing this piece of legislation to give to the governor to require him to do something that he could do if he chose to do, but required him to do a study, to go forward this plan. But in this legislation that we're approving today or that will be approved today, I'm pretty positive. I'm voting no, by the way. But, that we'll get past this committee and pass the floor.

It doesn't identify an employer, what an employer is. Doesn't identify an employee where that employee's part time, full time, working their way through college, a senior on medical that is just trying to supplement their income or whatever. So that none of that is in this language. I mean, the only reason I'm asking is we got this language. When did we get this language, Kirk?

This morning? Yesterday? Yeah. But us. When did we get the briefing and everything on it?

Like Monday. Today's Wednesday. Monday morning. And today's Wednesday. And it was several thousand pages.

So just curious. That's

asking these questions. It doesn't identify an employer or an employee or hours Correct.

why I'm

Or pay. As as I'm asking

As as the chair stated and and my colleague stated, it is more direction that the administration should come forward with a plan. And that plan would likely would need to have trailer building which are statutory changes. And those types of definitions would at that time be included. So currently, it is just a a not a not a request, but it would be a shall. The administration shall do these things.

And so right now, it is a a concept and then the administration would put forward the actual plan. Okay. Thank you.

Thank you, miss Lee. Forgive me. I forgot your name, sir.

Aaron Edwards.

Okay. So you were when you were making some comments, I'm moving to the MCO tax. When you were making comments on the MCO tax regarding prop 35, you said, that let me see. I tried to write it down as you were talking. But you said you didn't, that Prop 35 was no longer applies.

You made that statement when you were addressing, I believe, HR 1 and implementing Prop 35 in the same conversation. If prop 35 no longer applies, don't you think it has to go back to the voters to tell the voters that it no longer applies because of what's going on? Or do you think the voters have no say so even after they prop pass prop 35?

Sure, Senator. I'm happy to clarify that issue. So on under, Prop 35, we are required to submit to the Federal Government a request to renew a MCO tax that's substantially similar to the tax that was approved in prop 35. In the events that the Federal Government does not approve that, that the state is unable to achieve an approval of an extension on that tax. The prop prop 35 allows for the the wind down of of prop 35.

Recognizing that the tax cannot be continued without federal approval. So happy to elaborate on on what our what our plan is. I spoke to that earlier and can explain that in a little bit more detail if that's helpful.

But

essentially, the what what you're I think you were referring to in my previous statement was was alluding to the fact that under Prop 35, it it sort of envisions what might happen if we cannot achieve federal approval, for the extension of a

So that was a base statement. Statement. If you put forward a plan, the state of California Correct. And the Federal Government does not approve it, then that would be Right. Would be something that would be effective of prop 35.

Correct.

Okay. So a lot of conversation was around HR 1. Is my understanding is that HR 1 restricted states from using taxpayer dollars to fund undocumented individuals under health care plans. Is that true or not true?

Okay. So a lot of conversation was around HR 1. Is my understanding is that HR 1 restricted states from using taxpayer dollars to fund undocumented individuals under health care plans. Is that true or not true?

I it says right here. It says HR 1.

No. They're just looking for the right person.

Okay. Right person. Sorry. Okay. But just so just for information, it says that HR 1 did not strip, Medi Cal or Medicaid in, for Medi Cal in California eligibility from US citizens instead of sweeping health care legislation focuses cuts eligibility restrictions on non citizens, non citizens.

So is that is that true? Did did HR 1 affect, citizens or legal residents?

So HR 1,

And just for your record, if you could identify yourself. Yes.

Thank you.

Thank you.

Guadalupe Manriquez with the Department of Finance.

Nice to meet you.

So HR 1 did make a change to certain individuals who are qualified non citizens. So under federal law, they do have some status. But for purposes of eligibility, federal eligibility for Medicaid, they are no longer eligible to receive federal share. So those are qualified non citizens. But technically, they do have some status.

Okay. But what about, non non citizens with no status?

HR 1 also imposed work requirements for single childless adults regardless of status. So and also, eligibility redeterminations every six months for, you know, all single childless adults in Medi Cal regardless of status.

So did HR 1 take California's ability to pay illegal undocumented individuals with their status, their eligibility for Medi Cal?

So California always operated a state only program for Medi Cal. Under the Federal Government, California and other states are still able to claim federal, dollars for emergency and pregnancy services for undocumented Californians.

Yes. And so tell me how HR 1, since it you're saying it doesn't affect but a very minimal tiny bit of population that are undocumented, what, why are we using individuals who have health care plans, like regular Blue Cross Blue Shield, take your pick, I don't care, who are working, who have healthcare plans, and their plans are gonna go up, I don't know, 1,500,000,000 total a year, probably $400 per family.

So somebody who's a plumber of whatever who has a healthcare plan is gonna pay an additional $400 or higher, depending on their family and the age of that employee or that employee. It's all varied on age and respect or all those things and the number of employees associated with the plan. How is how is that gonna backfill?

What is that gonna backfill? What are we backfilling if we don't need it? Because it only comes You're talking about a very small amount that HR 1 affected. You said pregnant individuals who are here, emergency rooms things. So that's a very small population of the undoc population.

If it doesn't have a blanket coverage reduction, and we so we allocated what $13,000,000,000 to undocumented health care. And then, if it's not over that, and it's just on that very small percentage of population, why is there such a need for a high, backfill from plans?

The Medi Cal program as we've, testified before this committee has grown significantly, over you know, in 1920, I think, general fund expenditures for Medi Cal were roughly 20,000,000,000. In the current year, Medi Cal expenditures are over 48,000,000,000 general fund. And so the MCO tax, as my colleague noted earlier, supports supports Medi Cal and our ability to continue to fund, all services. So 44 like I mentioned, 44,900,000,000 in budget year.

So And so but please just answer my question. I'm just asking you and I'm I I apologize. So my question is is that even if the number went from 20,000,000,000 to 48,000,000,000, we would still get federal dollars, right? Federal dollars for whoever that's legally authorized to be here or has some type of documented status.

You just said that undocumented healthcare is only affected HR 1 only affected a very small portion of that population. Those that are pregnant, emergency, with a company children. To make sure the kids that, you know, they're here undocumented, they're taken care of. That's I I'm not disputing that. I'm just saying that HR 1 only affected that very small number.

But yet, we're taking billions to offset cost. The HR 1 had nothing to effect. Is that true?

And what I would say to that, Senator, is that, our MCO tax proposal broadly supports the Medi Cal program. So we are putting forth a plan, MCO tax plan that is allowable now under new HR, 1 requirements to, support the overall program. The impetus for the MCO tax, is not, it's for the overall program, not for a specific population.

Okay. So when we have somebody on medical, we can get money from the Federal Government. What is it? Like 60%. Right?

It depends by, it depends by category of eligibility. But Okay. It could be fifty fifty, 65%.

What's the lowest? Let's go with the low.

50%.

50%. So someone on Medi Cal in California, the Federal Government gives us 50% of that cost.

If those individuals on Medi Cal here in California are not in the undocumented population, do we still get with HR 1 50% at a minimum?

For emergency and pregnancy services?

Just that small population. We don't get it for anything else.

Can you clarify your question, Senator?

So you just said that 50% of our Medi Cal funding comes from the Federal Government. It could be 65, but we're going with a low number just for for conversation's sake. So the Federal Government gives us 50% of anyone on Medi Cal or just pregnant people.

We get a federal share for anyone that is eligible for Medi Cal. Depending on their eligibility of category, we get the different federal shares.

50 to 65. We already established that.

Yes. Okay. And before, undocumented individuals, we only get, that share depending on their eligibility category for emergency and pregnancy services. But I don't know if my LAO colleague has

That's okay. I just wanna so let's let me just do 1 follow-up question on that. So when you said that we get federal dollars, so with HR 1 in place, do we still get federal dollars for those pregnant emergency care services? Do we still get money from the Federal Government? But we don't get HR 1 eliminated federal dollars for undocumented individuals who do not fall into that category.

Is that true?

Just for the qualified non citizens that I, mentioned earlier.

So we get federal dollars for the individuals that you mentioned earlier which were pregnant individuals. Okay. So we still get federal dollars under HR 1. So is it fair to say and this is where I'm trying to get the point across. We are increasing a huge top tax on individuals who work hard, the plumbers, the construction workers, the line, anybody.

We're imposing a share on their insurance, whether it's Blue Cross Blue Shield, I don't know where they get their insurance. Health net. Those employees are gonna pay an additional cost to backfill HR 1 because the Federal Government has taken California's ability to provide whole Medi Cal insurance at a 50% match to those that are undocumented or illegal status here in California with the exception of those that are child have, pregnancy and children. Is that true?

Again, I would say that, the MCO tax proposal is, again, like my colleague mentioned, a bigger part of the puzzle to help support the Medi Cal program and the overall state budget. So that's

But we wouldn't need the Medi Cal program if we weren't spending $12,000,000,000 We wouldn't need the MCO tax if we weren't spending $12 $1,200 $12,000,000 excuse me, $12,000,000,000. I guess my conclusion that I'm trying to draw that I can't get an answer or confirmation, maybe Ms. Lee can answer that. You know where I'm going. Can you help me out or answer the question?

I will attempt to. I don't know if it will be the the correct answer to your question. But I would I just wanted to say

Thank you for your answers.

Overall that, this administration, this legislature has in the past prioritized certain policies such as providing health care to, Californians no matter their status. And as we've been saying I don't disagree with you. And and as as we've been saying, the MCO tax is part of one way that we help to pay for the entire program.

And because of the changes of HR 1 that are not solely in Medi Cal, but also in our our SNAP program, CalFresh, we are seeing a hole in the budget that we had previously not seen when we had further federal support we that we no longer have for various reasons. And as an entity, as the administration and as legislature has voted in the past, we want to continue to highlight those priority programs that we've been funding, and this is one way to do that.

And so it may not answer your question specifically.

It does. And I thank you for the comment. And I'm not trying to just beat the you know, I'm not trying to beat the comment down, but I'm just saying that, there's a huge conversation on the other side of the ... and the chair even opened to that. That the only reason we're in this situation is because of HR 1.

That's not true. The reason we're in this situation is because California has made decisions to provide health care coverage to individuals who are not, legally authorized to be here. And we have an administration now that is not willing to use taxpayer dollars to do that. And then now instead of, you know, trying to figure out a way that we fix this without taxing citizens and other employees that are working. And again, I'm not trying to diminish or I'm not I'm not being negative towards undocumented individuals.

I'm saying that if you're a plumber, if you're a construction worker, if you're a lineman, if you're anybody that works in this state and you have commercial coverage, you are now gonna be paying an additional cost for your coverage, and the employer's cost is gonna go up along with the employee's cost in order to cover the policy coverage that has come out of this building to cover undocumented individuals in this state, because we're no longer getting the match from the Federal Government.

Now, the Federal Government, based on the conversation that was just provided earlier in the other witnesses testimony, the federal HR 1 funds do not eliminate, emergency room or emergency or pregnant and individuals with children. But just average, I mean, average everyday individuals here that are undocumented, that are not working, or that have Medi Cal or whatever the purpose is for them having Medi Cal because it's extended by the state of California.

Cost are gonna go up for every other individual that has a job that's working that's here legally, and it's gonna come out of their health plan cost. And that was not the extent and I think the plans were thinking that if they made this deal a few years ago to try to help the situation that we were having, and we did do the MCO tax, first tax they ever voted for, MCO tax.

That's why they funded Prop 35 to make sure that we can do exactly what's happening here today and go after more dollars when the plans when you saw an avenue for revenue funding. So, I just wanna make that point. And thank you for your answers, both of you. One thing else is that on on 177, just, with the chair's indulgence, on the financially distressed hospitals excluded from that. I mean, we have some serious issues.

And if this goes into play, would you take that in I know it's a study and we're gonna discuss it. I won't be here. So can you make sure because I know you'll be here. You do very good at your job that you guys discuss, you know, like financially distressed hospitals that are gonna have to pay this additional cost because, say, somebody empties the garbage cans or answers the phone or whatever it is, and they are somehow connected to the Medi Cal system.

The financially distressed hospitals cannot pay this $282, $242, whatever the number is, per employee per month, every month.

They already have issues. So are you would you take that into consideration? I will write it down. You're awesome. Appreciate you.

Appreciate you. Okay. So going to the use tax, the service tax is what I call it. So this opens a big door, you know. Right now, if you have a plumber come to your home and they put pipe and parts and electrical wires or whatever it is to make your plumbing work, you pay taxes on those products that are tangible products.

You don't pay taxes on the services that they provide. Is that your expertise? You're coming back. Thank you, sir. That's, this opens a huge issue.

The reason why we did that so many years ago in in California is because we wanted R&D. We wanted software development. We wanted those corporations to stay here. Is there a fear that I mean, maybe you guys have talked to these people that, if this goes these these companies are mobile. These employees can live in Texas.

They can live anywhere in the world and still work because of technology that's available to us today. Do you think this R&D will leave our state? Is that a fear? Have you already talked to them? Are they not worried about it?

We have talked to the industry. We, we don't think they're not they're going to leave. Now there's a couple of reasons for that. One is this is this is a very reasonable reasonable level minimum level of tax that we're asking the largest corporations to pay. And then the first first part of the of the proposal is that you can claim tax credits up to $5,000,000 at a 100%.

So there's no no limitation at all up into that point, which means

When you say 5,000,000, do you mean 5 what did you say, 5,000,000?

Up to $5,000,000 of liability can be offset at 100%. So that means that a taxpayer with up to, like, 57,000,000 in taxable profits would pay would still be able to fully utilize their credits in any given year.

I just need to clarify one thing when you stop right there. There. So, so are you saying that, gross income or net income?

So net income. So a lot Okay. Credit is applied against, your your final calculated liability after

So net income.

After the asset on net income. And and then what we also see in the data is that less than less than a 100 corporations every year claim more than $5,000,000 in credits. So we're talking about a relatively small subset. Think of there's over a million corporations in California that do business in California. So like 100th of 1%.

And then, and then when you look at where the proposal is right now, it is allowing, for three years, it's extending the temp current temporary limitation. But then it applies it allows refundability, so tax payers will be able to fully fully utilize their credits just at a later date. And then in 2030, we implement or the proposal has limits it to 70%. They can claim up to 70 of their liability. So this is in line with many other states.

For example, Florida, Georgia, Massachusetts, Connecticut, all have limitations along those lines. And it's really it's really to ensure that that the largest corporations pay a minimum level of tax. So if you think about a corporation that has a $100,000,000 in profits, they would pay $30,000,000. Right? They would have an effective tax rate at most of 2.65%.

So it's a middle ground. It preserves the incentive impact of the R&D credit, but at the same time, it does establish that these corporations would pay would pay a minimum level of corporate tax to the state.

So let's go back just a minute to like the financially distressed hospital. They download Microsoft, QuickBooks, all that stuff. Are they subject to that tax?

Well, that's a different tax. So say, we're we're talking about the R&D tax credit. Now, you're talking about sales tax on software. So the sales tax on software is

So there's not a use tax on the software?

It depends on how it's if it's, it's a sales and use tax. So it depends if you buy it in person, it's a sales tax. If you're if you purchase it out of state and bring it into California or you purchase from an out of state vendor, for example, if a hospital purchased from an out of state vendor, then it would be characterized as a use tax cause it's being used in California.

But effectively, it's it's it's your paying tax on software used in California.

So it's not just the high profiler, the individuals, the Nvidia's, all those people that develop the software and stuff. It's not just them that will be affected by this tax. Anybody who downloads or uses the product, it'll be a use tax from the college kid that downloads it as as, you know, right? Or is there a limit on them as well?

No. There's no there's no exceptions. It applies it's it's extending the existing sales tax which which does apply to pre written software. So not certain not custom software, not services. It's extending that tax to to all to software regardless of how it's delivered.

So thirty years ago, it was delivered in a box. Yeah. Now now it's delivered in in different ways electronically. It's accessed remotely. So the tax, as far as incidents, you know, software is purchased by consumers, but it's also predominantly purchased by businesses.

So roughly three quarters of the software. So the example you gave would be one example. A lot of other examples would be a business purchasing. Right.

But anybody. Yep. So everybody in California is gonna be affected by this tax. Yes. Yes.

Okay. Alright. Well, thank you, very much. I appreciate your comments and thank you for your directness. I got that right away.

I have to dance around some other stuff but I got yours right away. Thank you.

Thank you very much, Senator. We'll go to Senator Seyarto and Senator Menjivar is on deck.

Thank you. So I just have a kind of an overall comment on the approach that we are taking as a legislature and and the administration in addressing what we feel is a shortage of revenue. We we don't have a revenue shortage. If this were a family and they made a $100,000 a year, but they wanted to spend a 110, their choices are, to go get another job that pays them a $110,000.

It's not to go next door and tell all of the neighbors, that they need to chip in so that they can continue to spend more money than they're making.

The approach that we need to take when we're talking about revenue is increasing jobs so that more people are putting into the system. Which means we have to have better job attraction of the very corporations that everybody's attacking here. They need to be here, not in Texas. They need to be here, not in Arizona. Because that's what brings in real revenue.

What we are doing is we are going to the same well over and over. And it's kinda like that family who makes the 100,000, once they've spent all of that and they need to go find some more, they use up all their savings. And then they start pulling the cushions from the sofa to find that spare change. We're looking for spare change and that's called taxes. Now, no matter where these taxes happen, they wind up being taxes on us.

That means we pay more. This year, this year, this legislature, not this, but the beginning of this legislative session. The talk was we are going to reduce costs for consumers. But everything we're doing is increasing costs for consumers. Because when we're talking about all of this, this new MCO tax, that's increasing cost on consumers.

So, I don't know that this approach, how long we can do before the well runs dry. And you can see what the well runs dry looks like in some of our election, stuff. People asking for, tax hikes all over the state. A lot of them are not happening. No matter how dire the situation has been painted for those citizens, they're done.

They're done having taxes raised on them to help this out of control spending that we have going on in California. And the reason they think it's out of control is because we are creating programs just like the one that my colleague had just alluded to, that we cannot afford. So instead of saying, hey, we just can't afford that, what do we do? We go find a way to tax. The original way to tax was the MCO tax, the original one.

And I have a question on the MCO. Can you bring me up to date on the original MCO tax and then also what this additional tax is on top of the other MCO tax that we had? What has happened to that? How much money is it generating and how much money goes into the, reimbursement for hospitals for Medi Cal.

Aaron Edwards with the Department of Finance. So, this MCO tax that we're proposing, it would be the only MCO tax in place.

Okay. So it's replacing whatever from before.

It's replacing, Correct.

Okay. And so it's, and this one is the $1,500,000,000 Because the other one we had, I remember there was quite a bit more money and some of it was going to general fund and some of it was going to to Medi Cal reimbursement and we're kinda shuffling the thing and that's what the Federal Government got fed up with. Because and and the the the truth about the reimbursement for people that are not here legally, is that the Federal Government has never never reimbursed for that.

Is that true to your knowledge? No administration ever has reimbursed for people that are not citizens of the

Only as my colleague from the department.

Except for those exempt.

For emergency and and pregnancy care. Correct.

That was what was always limited.

Correct. Yes.

And when we did our original MCO tax, it was Kinda meant to there was a little bit of magic in there that helped us get around that a little bit thinking that we could fool the Federal Government into doing that. They caught us. And that's the part that got cut out. So right now, we're going our share of Medi Cal is $48,000,000,000. Is that correct?

Yes.

48 to $50,000,000,000 a year.

General fund only.

General fund only. And then the entire Medi Cal budget is 223,000,000,000. Is that what it is?

I believe it's about 150,000,000,000 total funds.

A 150 total funds for outside of California or just because Oh,

I'm sorry. I'm sorry. Within California. Federal funds and state funds about a 150,000,000,000.

So the state is the Federal Government is still augmenting that by a $100,000,000 or a $100,000,000,000.

Yes. Across all funds.

Alright. So they haven't cut out a bunch of our funding for this stuff that they've always

The foundational program did or does have changes, as a result of of HR 1 as my colleague mentioned.

The changes are the the part where we thought we were gonna put one over on them and they didn't they didn't they caught it. So anyway, alright. So anyway, we've got that sorted out a little bit. Bottom line is what we're doing is unsustainable long term. And it may not it may not fall flat while we're while the people up here are up there.

We'll term out and we'll be on our way. But this is going to catch up with us. This kind of approach to budgeting and governance and spending well beyond what our means are is going to catch up with us. So at some point we're gonna have to be a little bit more responsible about how we're approaching this revenue shortage because it's not a shortage. When we make $20,000,000,000 more than we made last year, it's not a shortage.

It's foolishness. If we are if we are coming up short and we have to tax even more to be able to to just do that and that's only this year. Wait till next year and the year after. We're gonna we're gonna wind up going bankrupt as a state. And that and for a state that is the fourth largest economy in the world, that is inexcusable.

So anyway, I'm kinda tired of watching taxes go up and up and up. And so is everyone else. And we're gonna and eventually they will, they will send us the message. And and we're gonna be trying we're gonna be making drastic cuts on things that are going to be painful.

And they're all the little programs that we've thrown in there to increase our costs all these years. And, and and that's going to be, that's that'll be very difficult for for us to rectify at that time. So, anyway, with that, I will get back to the chair and, those are my comments. Thank you.

Thank you very much.

Chair, may I make a comment in response?

Sure.

Okay. Thank you for your comments, Senator Seyarto. I just wanna point out that in the 2025 budget act, we did acknowledge that there were structural problems with the budget. And we dealt with that in the budget, but we also attempted to deal with some of the structural deficit in the out years by providing up to 12,000,000,000 in ongoing cuts in the 2025 budget, acknowledging just as you said that we, our expenditures were outpacing our revenues. Acknowledge that again in the governor's budget.

Acknowledge that in the May revision with, the proposals that we forward, which at that point included a what we would say a balanced approach at attempting to address the short term as well as the long term issues by raising some revenues, as well as providing for additional cuts beyond the 12,000,000,000 from last year. So I just wanna acknowledge that that was something that we recognized, both the legislative analyst office as well as the administration through the Department of Finance.

It is an issue that is not a revenue problem that we are attempting to address, but understanding that we could not make billions and billions of debt 30, 40,000,000,000 in cuts at this point. So I just wanna acknowledge the fact that, as we've all said, these are difficult decisions, both on the expenditure side as as well as on the revenue side.

And we're attempting to do a balanced approach at addressing a two year budget and having a positive SFU both in budget year and budget year plus one, but also reducing the structural deficits by more than half in the out outgoing years.

So just wanted to acknowledge that. And

and I would say thank you. I appreciate wanting to have a balanced budget. But balancing budgets don't have borrowed money. They don't have future tax revenues based on raising taxes and things like that. The balancing is just how much revenue you have and this how much we can spend.

And and that's a balanced budget through natural processes. And and we're not we're creating more taxes so that we can we can keep up with our spending and we we're having a hard time even doing that. So I but I do appreciate the efforts because I have seen that and the reserves and things like that. Those are really good positive moves. But this is going to continue.

And and it's just gonna make eventually it will catch up with us.

Thank you. Senator Menjivar and Senator Reyes is on deck.

I want to start off first by clarifying because I know we're throwing a lot of HR 1, and HR 1 is only going to impact a little bit. Why are we offsetting so much if it's only impacting the small percentage of our undocumented individuals? But the increases to Medi Cal as a whole are not as a result of us covering a state only funding for undocumented individuals. We are seeing an increase in Medi Cal because here in the state of California, we believe people deserve health care.

Not that UIS population, everyone.

And also because HR 1 cut a lot of our ability to provide funding for these individuals. For example, the HQAF, the hospital quality assurance. Fee was incorporated into our last budget and HR 1 removed that, creating a big hole in our budget that we now have to offset to protect our hospitals because HR 1 removed our ability to do that. That is not at the fault of undocumented individuals. That's something that the Federal Government decided to do that we're trying to backfill.

Also, we are owed almost half $1,000,000,000 from CMS, because they haven't paid our a lot of, matching funds. And we have to put general fund dollars up to cover the cost now because we don't know when those payments are going to come. So as a result, it's the Federal Government, not the undocumented population as to why we are spending more in the Medi Cal.

We are spending more in Medi Cal because we believe seniors should stay on health insurance, and we do not wanna bring down the asset limit test to 2,000, and kick seniors and people with disabilities off of health care. It is not the fault of the undocumented individuals as to why our Medi Cal, costs have, ballooned so much.

It's because we have a silver tsunami and more people are aging at this point right now in time than any other time that we've seen in our history. We have high costs in Medi Cal because pharmaceutical companies, respectfully, are gouging everyday, Californians and everyday Americans and causing us to pay so much more in in, drug costs, not because the undocumented population are covered by state funded.

In fact, in this budget, we are moving undocumented population into a fee for service, creating a more cost effective, cheaper cost than anyone else who is covered by health insurance. So in fact, it is more cheaper, to provide this health insurance to the undocumented population than ever before. We are removing services from undocumented individuals.

So the cost is not the undocumented individuals that is ballooning Medi Cal. It's everything around. And, 1 other thing, I would say, with the HR 1, we have to backfill is because we have to give money to counties to make sure people stay on Medi Cal and CalFresh because HR 1 is banking on people falling off of Medi Cal with the added two times now redetermination and the added worker requirements.

Not because people aren't working, because close to 50% of people on Medi Cal are working. It's because they are banking on the fact that the paperwork will be so burdensome that they will fall off of Medi Cal.

So we have to help counties, give them more money so that they can help people get back on Medi Cal. It is not the undocumented people's fault that our Medi Cal costs are skyrocketing. It is at the hands of the Federal Government who have now put us in a situation that we have to backfill so much more that we would have never had to backfill before. All that being said, it is no secret that I'm not a fan, personally, of this new MCO tax.

I am a huge fan of the fair share plan because that will put a tax not a tax, it's not a tax That will make corporations pay their fair share for forcing their employees to be on Medi Cal, where you and I now have to take on that, bill.

We have to pay for their inability, not their lack of capacity, their inability to make sure their employees have enough hours so that they're on their own employer health insurance and that they continue to, rake in billions and billions of dollars and have a 100 homes across the the world so that people are still forced to be on Medi Cal. I would prefer that route. Instead of the route we are taking, yes, it's $8.85 per member per month increase in premiums.

I am not a fan of that. I would hope that the in the three party deal, we continue to work on considerations to offset that.

Because starting January first of 2027, $8.85 a month is a lot for a lot of people it's 110 a year, that's 440 A year for a family of four. I don't think that's the ideal the ideal route we should have added on. But regardless, I'm one of a 120 members and a 119 others. We might have felt that this was the best route to take for right now because I understand people have worries of other stuff. But to say that we're here in this situation because a senora wants health insurance, I think it's offensive.

And we wanna make sure that the facts are out there of exactly why we are paying so much. We're paying so much because we're a state of entitlement, and we think that people with disabilities deserve access to IHSS, to every kind of, services.

You would be hard fought to find a state that provides more services to our marginalized communities than California, and I'm proud that we I'm proud that we fight so much to give so much to individuals who, if we don't, will be on the streets, who I don't know how they would figure it out. So I'll jump into my questions. Oh, and we never got a match for undocumented.

Let's just make that clear. For Medi Cal, that's always been a state funded program. We don't get matches for to cover the undocumented population. That's correct. Right?

Maybe for the UIS expansion of legal permanent residents, but for undocumented, solely undocumented. We've never gotten a match from the Federal Government.

Just for emergency and pregnancy services. Yes. Yes.

Yes. And Tallah, for sure. I just wanna make that clear. We've never had that match. For the MCO tax, what considerations are being taken to offset that increase?

And I know that it's gonna be for three years of that increase. Is there anything that we're thinking about to offset that increase in premiums attached to that question? Who is gonna be paying that?

Thank you for the question, Senator Menjivar. So in terms of offsetting the increase, under federal law, the state cannot offset directly the cost of paying that tax without violating federal law. So there cannot be a sort of direct offset of that rate. In terms of who pays the cost, so to be clear, the tax is imposed on health insurance plans and not on consumers. We know that plans will respond in different ways to that.

Some may choose to pass on those costs to consumers in the form of higher premiums. Other plans may choose to absorb some of those costs and reduce their profit margin to maintain more competitive premiums. I think that that in general, firms will tend to do some combination of the two. And so I think that in this case that that may as well be the case.

And plans, some plans have already submitted to, submitted the rate request in the middle without taking this into consideration. Is there an ability for health plans to readjust that rate request given this new MCO tax?

I don't know the answer to that question. We would have to to get back to you on that.

Okay. For, for the, for covering California ACA individuals, we have a pot that exists that has helped offset premiums. We're putting in $300 million, a historic amount, in this budget. A lot of people are paying $0 in premium. I guess my question for consideration is, is that a way we can help for in for the people that the health plans will not absorb those costs and bring it down to consumers?

Can we help in that way?

Guadalupe Manriquez is with the Department of Finance. So as my colleague mentioned, we can't directly offset per federal law. However, I would note that the intent of the 300 million in Covered California is to help consumers overall with their cost of care on covered on, in the covered California program.

But for the potential increase, it's not just gonna be for those enrollees under covered California?

The 300 million is just for individuals in covered California.

And the tax. It's not just for plans under. Yeah.

Correct.

How then for Medi Cal beneficiaries? Can you explain to me, we don't charge. So how, they wouldn't see any impact?

No. Medi Cal beneficiaries wouldn't pay anything.

So those plans would just have to absorb it?

Well, essentially the cost of doing business goes up for those plans. And we use actuaries that determine the costs for the plans in terms of setting the capitated reimbursement rates that the state pays those plans. So the tax would you know essentially be incorporated in the cost of the plans during business. So the state ultimately ends up paying higher capitated rates to plans.

Okay. Thank you for that. On the digital tax, if I download Canva because I'm looking to do a flyer and I wanna pay for the premium Canva. Am I now gonna be, is that eligible under this tax?

Colby White, Department of Finance. Senator Menjivar, so most likely, yes. It sounds so that it's a tax on software and, software is defined as a set of coded instructions meant to cause a computer or data processing system to perform a task. So I'm not familiar with that program, but it sounds like software.

Adobe, I think maybe Adobe. You were familiar with Adobe. There's different versions of Adobe for a business. A college student who just downloads Adobe has to pay for that. Would that tax be applied for that, to that student?

Yeah. There's no, the we're extending our existing sales tax laws to this to this, to pre written software regardless of how it's delivered. And so just like a college student would pay sales tax on buying a computer or buying software if he had bought it, he or she had a disc, then yes.

Okay. Thank you for that. I think it's disappointing that this legislature struggles so hard to tax corporations. But in a blink of an eye, we tax everyday Californians. It's upsetting.

I recognize we need revenues but there's there's always more of a bang at the door if we're looking at tax corporations than there is to tax everyday Californians and that's upsetting. Mister chair.

Thank you very much. We'll go to Senator Reyes and Senator Blakespear is on deck.

I want to begin by applauding the governor and the legislature for trying to find creative ways to raise revenue. It isn't easy. And in fact, the end of January budget, there was nothing for revenue. And it takes a lot of discussion about how we can be creative, how we can find ways to to bring in some revenue, especially when we're dealing with a structural deficit that we have to deal with. And so we're looking to the future to try to figure out what we do.

And so I do applaud him, for that for the May revise, including, what we are voting on today. I also applaud the Senate for, and and now the assembly, for looking at this fair share, fair share program to to fair share from big corporations act to to find other ways to make sure everybody pays their their fair their fair share.

I also want to be I just feel that with all this conversation about our undocumented population, we talk about them as if almost inhuman. That these people that come and try to leach off of California, in fact, they're paying an average of $9 billion every year in taxes to the state of California alone and receiving no tax returns as a result of that. They are the ones taking care of our loved ones.

They are the ones putting food on our table. They are the ones building the homes that we live in. The these are the things these are the people that we're talking about. And I think it's really important that we recognize who we're talking about. They are parts of our neighborhoods or parts of our family.

They are, they are very important people to the state of California. And California, many would argue, is the fourth largest economy thanks to the immigrants. Whether they are currently documented or undocumented, whether they have status or don't have status, whether they've been here for thirty years or recent arrivals. These are the people who have been working hard to make California the fourth largest economy because it isn't the corporation and the corporate head that makes this the fourth largest economy.

It's the people working for those corporations that make this the fourth largest economy.

And I felt very. It's troubling to hear comments otherwise. When we're talking about fair share, all we're saying is let's study this. For too long, now one of my colleagues mentioned Walmart. Walmart isn't the only one. For too long, many of the corporations have provided even full time employment or just under full time employment and then they provide the application form so that their employees, full time or almost full time, can go apply for Medi Cal because they qualify.

Why do they qualify is because they don't have medical coverage provided.

And what we are saying in this study is although the legislature may have thought let's go ahead and begin the process, the governor to to his credit said, let's study it together. Let's figure out what we can actually do. Let's figure out if there really are corporations that are not providing medical coverage so that if we are going to move forward, we've got the data. And that's what this this this that's what the the bill is about.

That's what AB 177 is about is let's study it.

Are there these large corporations that rely on coverage for Medi Cal? In other words, rely on the taxpayers to pay medical coverage for their employees. Is this really happening? Is it anecdotal or is it really happening? If it's really happening, let's do something about it.

Let's study it and I think that's fair. I think that's very fair. Now, one of my colleagues mentioned, well if you're making a $100,000 and you wanna spend a 110,000, you don't ask your neighbors to give you to help you pay for that extra $10,000. I agree. I agree.

I have my own budget. If I don't have enough money then I say let's reduce my costs. However, if you're living with a group of people and some of them are paying their fair share, the others are not, and you can't pay your bills, at some point you're gonna say, alright, time to have a group meeting. You are not paying your fair share. You've been under the radar.

You have relied on us to pay for all of your expenses. It's time for you to pay up. I think that's fair. I think that's fair. And that's why the title of it is the Fair Share from Big Corporations Act.

Is all we're saying is if you've been relying on taxpayers, the rest of us, we're having to pay for medical coverage for your employees. If you're relying on us, it's time to regroup. It's time for you to for you to accept that you have got to pay your fair share. It isn't a tax. We're saying we want you to pay your fair share because for decades, you have not paid your fair share.

You've relied on the rest of us, our taxpayers, to pay medical coverage for your employees. And that simply is just not wrong. It's just wrong. We know, and this was from the testimony provided at our our budget hearing just a few days ago, 1.3 million Californians are going to lose their medical coverage. 1.3 million.

Now we can say out of 40 million, one point three million is not a whole lot. It is a whole lot for those 1.3 million that are losing it. We have heard from the county of Los Angeles the number of people that they alone are going to be lose they're going to be losing their medical coverage. The legislature is looking for ways to deal with this medical loss and health care loss in California. And and I applaud the governor.

I applaud the legislature for trying to find those ways to take care of this. And this is exactly what we're doing and this is what we are voting on today. We have a responsibility to do everything that we can within our power to protect access to health care for Californians who rely on Medi Cal, including children and seniors. As was mentioned by my colleague, we have more and more seniors. I'm one of them but I happen to have great coverage but many seniors don't.

And they are now needing more more more more coverage. They need more services and that increases the cost of our health care. Our seniors, those with disabilities, and working families trying to make ends meet. The proposals that we have before us represent practical and necessary steps to preserve federal funding regarding the MCO tax and also to strengthen Medi Cal and to help shield Californians from the harmful cuts that have come, yes, from HR 1.

I thank you so much for for all the information that you all have provided.

And with that, I would yield back to the chair.

Thank you very much, Senator. We're gonna go to Senator Blakespear and Senator Weber Pierson is on deck.

Okay. Thank you. Thank you, chair. I appreciate all the hard work that goes into this every year and particularly this year. I'm just gonna make comments on three separate topics.

So the first one is AB 125, the Medi Cal managed care provider tax. So I support AB 125 because it preserves one of California's most important tools for financing Medi Cal and drawing down our federal health care dollars. More than 15 million Californians rely on this health care coverage and maintaining a stable financing structure is essential to ensuring continued access to care.

With significant cuts expected under HR 1, replacing the expiring MCO tax helps protect healthcare services while reducing pressure on the general fund. So I am happy to be supporting that today.

The other thing I'd like to mention is AB 177. So I support AB 177 because California taxpayers deserve a clear understanding of whether public health care coverage is being used to offset costs that might otherwise be borne by large employers. At a time when Medi Cal faces financial substantial fiscal pressure, it's reasonable to ask whether taxpayers should continue absorbing healthcare costs that may be associated with the employment practices of some of the state's largest corporations.

AB 177 gives us the facts that we need before making any policy decisions, rather than rushing into imposing a making any policy decisions. Rather than rushing into imposing a new policy, it asks the administration to conduct the analysis necessary to inform future legislative discussions.

So I do think that that's a really important thing for us to be doing as well. And the last thing I want to mention is the, the anti weaponization fund. This is something that maybe has been talked about less today. But it's, I think this is a really important thing that we're doing.

And I just want to recognize how among the corrupt and self serving actions of our president, one of the more recent and egregious examples of this was the creation of this anti weaponization fund.

And the anti weaponization fund was created it's $1.7 billion created by the Department of Justice in settlement funds from the Trump administration's lawsuit with the IRS. So essentially, Trump appointed the top people at the IRS, sued the IRS over previous leaking of his tax returns, then settled with the IRS and presented this idea of an anti weaponization fund.

That would basically be a slush fund to, which is was promised, which is premised on a deception that would be able to potentially fund January 6, insurrectionists, on the taxpayer's dime. So this was, this is deeply offensive and and egregious. And I was very grateful to see the Department of Justice announcing it was not moving forward with this fund, but that announcement doesn't necessarily mean that that is what will happen.

So it's important that California be prepared to impose a 100% tax on payments that would be made from this anti weaponization fund and certain related settlement funds during the tax year of 2026 to 2029. So California is protecting ourselves and standing up for California's values and those of all Americans by saying that we would have a 100% tax on payments from that anti weaponization fund.

And I also just wanna mention as part of this that I was happy to see that there were 35 ex federal judges who asked the federal judge who oversaw that court to reopen the case, because it was a fraud on the court. And the recognition that a party can't do self dealing, keep the details from the court, and then have our court system bless that. And I just, a fraud on the court is something that's infrequently used.

And I just I just wanna share the sentence about what a fraud on the court is. So it occurs when there's an intentional deception in the judicial system, thereby corrupting the integrity of the legal process. Unlike standards, civil fraud, or simple perjury, it involves an egregious, unconscionable scheme that prevents the court from impartially adjudicating a case. So I do think this is a good example of that. And so I I strongly support this a 100% tax.

And with that, I will hand it back to the chair. Thank you.

Thank you very much. We'll go to Senator Weber Pierson, and Senator Archuleta is on deck.

Thank you, chair. I want to thank everyone for coming to present and answer our questions today. I do have some questions of my own and I do apologize if those were answered earlier before I was able to to get to committee. First, I will be supporting AB 122 and also of course the fair share.

You know, I think that I agree with my colleagues that have spoken previously about the importance of fair share, and the burden that certain corporations have been placing on Californians to to do what they should be doing.

But I do have some questions on the MCO tax. So, in November 2024, the voters approved proposition 35, the Protect Access to Health Care Act of 2024. That was a very clear mandate, That the MCO tax revenues must be used to strengthen the Medi Cal program by improving provider payments and expanding access to care for the millions of Californians who rely on those programs.

It anticipated that the federal policy changes may be required to change the current MCO tax program and included mechanisms to adapt the tax structure while maintaining its core purpose. Within the statute.

And I will rephrase the purpose. To to provide improvement in provider payments because we all know that medical reimbursement rates are dismal in this state. And expand access of care for millions of Californians. So why is it that AB 125 redirects the MCO tax revenue away from voter approved investments and expanding Medi Cal care and sweeps it into the general fund?

Thank you for the question, Senator. Aaron Edwards with Department of Finance. So, to the first thing I would say is that we're not redirecting funding away from Prop 35. Under Prop 35, the the measure requires the state to submit a request to the Federal Government to extend the a tax that's substantially similar to the tax that was approved as part of Prop 35. Knowing that of course that the federal approval is required to have an MCO tax.

So the measure also provides that if the Federal Government does not approve that that tax, that essentially the measure would be sunset and and wound down. The requirements for how the funds would be spent essentially. We are complying with Prop 35 and that we are planning to submit a request to the Federal Government to extend a tax that is substantially similar to the tax under Prop 35. However, that tax that exists today is applied disproportionately and that medical plans pay far more than commercial plans.

That is not allowed under HR 1.

And so we anticipate that the Federal Government may deny the request for us to extend that tax. And in that event, we are also requesting the Federal Government approve a tax that is substantially different than the tax under Prop 35. But complies with HR 1 by comply by setting a tax that's proportionate across all plans.

So I thought HR 1 prohibits states from implementing new provider taxes after July 4, 2025.

It's under federal law, this would not be new. It would be an extension of an existing tax.

But the extension of the existing tax is one that falls under Prop 35 regulations. So it's either a new tax or it's a part of Prop 35, which this significantly deviates from?

I think there are some nuances there. I I think we have with us here, Director Baass from the Department of Healthcare Services. I would invite her to come up if if you wanna dive into the details in terms of how the interaction works and and and how they distinguish how we distinguish between a new and extension.

Good morning, chair and members. Michelle Baass, Director of the Department of Healthcare Services. So under, the the proposal we would be submitting to CMS a renewal of our existing managed care tax. It would have two components. A component as was described that would be substantially similar to the tax authorized under or compliant with Proposition 35.

And then a component that is dissimilar to the tax authorized under Proposition 35 that would be kind of a per member per month across all of our our plans. This is similar to today. We actually have a MCO tax that is comply that is part of Proposition 35 and we have a MCO tax that is outside of Proposition 35. So this is similar to kind of the structure that we have today.

So it sounds to me like this new structure that you plan on requesting goes against HR 1 because it specifically states no new provider taxes after 2025. And this would be a new provider tax. You'd have some parts that adhere to Prop 35 with the new MCO. But this new structure would be a new request to the administration which is different. This would be a renewal of our existing managed care tax.

It's a tax that we have a transition period to provide. So it would be compliant in that respect with HR 1. But prop 35 also allows for flexibility, understanding that there would be transition period. I won't get into it, but I think that legally, you may have some issues there. Why are we taking money from health care and putting it into the general fund instead of putting it back into health care?

I'm not sure that we would agree that we're taking money out of healthcare.

Is it going into the general fund?

This funding would support Medi-Cal. So there's roughly $2,300,000,000 that would be generated from this tax. $300,000,000 of that is going to be earmarked to support targeted rate increases that took effect 01/01/2024. That's for non-specialty mental health, primary, and maternity care providers specifically. The remaining $2,000,000,000 is going to be earmarked specifically for the Medi-Cal program.

And I would just say, I'm not sure if you were here when Senator Smallwood-Cuevas asked a similar question for one of the other proposals, and that was the tax credit limitation as well as the prewritten software. And she asked if there was an earmark for the revenue there that was specific to Medi-Cal. I said generally that was not the case, that those are free general fund dollars that we could use to make decisions for the full architecture of the budget.

With respect to the MCO tax, these are earmarked for going back to support the Medicaid program. So distinct uses of the revenue.

You are saying that the entire MCO tax structure as you have revised it will go back into healthcare.

That's correct.

Okay. Now, I want to talk about these new rates that you have come up with, because one of the issues that we hear all the time from our constituents, we feel personally, is around affordability. It is becoming very challenging to live in California. It is becoming very challenging to afford to live in California.

And one of the top things that people do care about as far as affordability has to do with their healthcare. How exactly did you all come up with this increased per member rate for this new MCO tax structure?

So the rate is set to generate the $2,300,000,000. That's the $300,000,000 that I described for the targeted rate increases plus the billion dollars to support Medi-Cal. Our view is that that strikes an appropriate balance in terms of managing the affordability issue and supporting a critical social safety net program. And I think just important context to consider is, we've had an MCO tax in some form or fashion for twenty years now.

It's become an integral component of the way that we finance our Medicaid program. This is similar to many other states.

Virtually every state provides. Funds pay as part of their state share through some form of provider tax. And without an extension of the MCO tax, I think it's important to recognize we'd be leaving hundreds of millions of dollars in federal matching funds on the table. And essentially creating a $2,000,000,000 hole in the budget that we would have to address as a structural deficit. Yeah.

That would probably necessitate further cuts, you know, reductions to core social safety net programs such such as medical. So what we're trying to do here is strike that balance between affordability which is important. We recognize that and also protecting a social safety net program that we consider to be absolutely critical.

Right. Yeah. I I don't think I'm arguing that we should not have an MCO tax. I'm probably one of the strongest opponents of MCO and was a Prop 35 as well. But, I'll just give you an example from a healthcare facility in my area.

With the current MCO tax, there is a member share of $6.69 per member per year. With this new MCO tax structure that you're proposing under this bill, that would significantly go up to $106.20 per member per year. So that's $400 plus dollars for a family of four a year. That is a significant increase. So that is why I asked you, how did you come up with these numbers?

Also recognizing the issue of affordability. Because going from $28 a year for a family of four to almost $400 a year for a family, actually over $400, excuse me, is not insignificant, and it's not really a balanced approach in my opinion. So that's why I was asking how you came up with those numbers. Because when you look at it from how people are going to have to bear this burden, it is extremely problematic.

It is a huge swing from what they currently have to pay to what they will have to pay under this proposal.

I appreciate you answering my questions, as a Senator, but also someone who still practices in the healthcare space, still has patients, still has families that I interact with on a daily basis. I am very uncomfortable with this proposal and the economic burden that it will have on the families that I serve, not only as a Senator but also as their physician. Thank you.

Thank you very much. And we'll move to Senator Archuleta.

Yeah. Thank you. As we wind down, I'd like to thank you all for appearing before us and enlightening us on exactly how things look. And it's a tough burden, no doubt.

But it's also tough on the American people, the people here in California that are facing some of the things we talked about, whether it be Medicare, but in essence, we are the fourth largest economy in the world, and when we're told that we have people still on the streets, we have people without medical insurance, people that can't find a job, but yet we are the fourth largest economy in the world.

So I can't help but to credit you for the work you do, because the Senate, the Assembly, the Governor at the end of the session will come together, trying to address everything that pertains to California. You know, we do have a National Guard. We do have schools, colleges, and universities. We have hospitals. We have plants, factories that all need to come together to maintain that fourth largest economy in the world.

And I applaud the Governor for what he's trying to do. And we also have to look at all of us working together. But some of the issues that keep banging away at us is how are we going to take care of these seniors that are on Medicare. The ones that are asking, am I going to lose my medical insurance, how am I going to pay it, and so on.

So one of the things that comes to mind, the care that they're receiving from managed care, is there going to be such a hit because of the lack of funding coming from the Federal Government, is it going to increase?

We heard there were 1,200,000 people that may lose their Medicare. Is that going to get even worse, or are we going to be able to stabilize that for the future with this budget?

The estimates in terms of individuals losing coverage are due to the HR 1 work requirements in the adult-only population. And so individuals, I think in the beginning of your statement you were referencing older individuals or individuals with disabilities.

They often will be eligible for exemptions. If they're dually eligible for Medicare and Medicaid as a single adult, the work requirements have exemptions for the medically frail or those who need certain types of care, such that they don't have to meet those additional requirements. So we wouldn't expect those estimates to increase for the older population, if I've gotten to the heart of your question.

Yeah. And the other thing that we mentioned, of course, the fair share. We heard that earlier from my colleague, fair share. But also, on one side of the aisle, and I think we all have to agree to this, is that we can't continue to keep subsidizing, and fair share comes when employers need to up their game, which in turn, if that were to happen, billions of dollars would be free to service so many other things that we need.

So that fair share, again, I think it is on both sides of the aisle.

When people contribute as much as they possibly can, but fairly, to go ahead and address some of the things we're looking at today. So as we move this budget along, I think it's the only way we're going to be able to sustain what we have and even continue to grow.

So I'm going to support the budget, and we're going to keep looking to see what we can do and hope that things will change with the Federal Government in time after they review California as one of the greatest states in the union and the fourth largest economy. So I'm going to be optimistic. So with that, Mr. Chair, I'll give that right back to you.

Thank you. Senator Niello.

Thank you, Mr. Chair. I'll bat cleanup here, and I will be quick, mindful of the fact that that phrase is normally followed by an endless string of words. I will not do that. Clarification with regard to the answer to Senator Weber Pierson's question, that the general fund portion of that is dedicated to healthcare. The only way that can truly be assured is if that money actually went to the healthcare organizations and not to the general fund.

Because the general fund is infinitely fungible. Infinitely fungible. So just a clarification to that point. With regard to fair share, that is kind of fungible too. One person's fair share can be another person's disproportionate overcharge. It's in the eye of the beholder. So, not necessarily following on that comment, but as a point of question and clarification.

We have very large public sector and non-profit employers in the state of California. Will those organizations be looked at also?

In regard to AB 177?

Yes.

Again, I stated, I think the concept is for there to be research and a study created. And so I think, as I noted to Senator Grove, I can definitely write that down. But there's nothing structurally that is part of that study yet.

I would stress that, in order to be fair, that ought to have a global look relative to, if we're talking about employers and if we're talking about employees of employers that are on government-provided healthcare plans, we have to look at all employers. So I just want to make that point of clarification.

Thank you. I have one closing comment, and then we're going to move to public comment. And it's on the MCO. There was lots of discussion earlier in particular. And I just want to be clear.

I did this in my opening statement. HR 1 killed the current MCO tax. This bill replaces it with a federally compliant MCO tax. There is nothing in this that has to do with undocumented services. I just want to make that clear.

With that, let me do a show of hands. How many people would like to speak at public comment? And I'm suspecting there's going to be a bunch of people running in from the hallway that have been sitting out there lolling during our discussion. Okay. We are trying to be done by noon.

So I'm going to encourage everybody. I'm going to cut you off at a minute, and I'm going to encourage you to take less. So if you would please come.

Chair, may I have one response back to Senator Niello?

A quick one.

Very quick. I just wanted to point out that the MCO revenues do not go back to the general fund. They go specifically to a fund that is for the Medi-Cal program only. So it is earmarked. Just wanted to highlight that.

Okay. Now we are going to move to public comment, and I urge you all to show restraint. Welcome to the committee.

Good morning, Mr. Chair. Chris Micheli here on behalf of Los Angeles Area Chamber of Commerce. As mentioned in Monday's testimony on the budget, we are opposed to the tax increase proposals, and we just note for your consideration that the 50% or the $5,000,000 cap has been in existence for several years despite rising revenues, as well as the employer community is burdened by a $1,600,000,000 annual payment to the Federal Government to repay our debt in the UI fund. Thank you, Mr. Chair.

Thank you very much. Welcome.

Mr. Chair, members, Sara Flocks, California Federation of Labor Unions. We are here in strong support of the revenue proposals, especially the software as a service tax to modernize our tax base, the cap on the corporate tax breaks, and especially the Medi-Cal Fair Share Act. Over 60% of Medi-Cal recipients in the state are workers. That begs the question, which companies and why are they paying poverty wages and not providing affordable healthcare.

The Medi-Cal program was meant to be a healthcare safety net, not a corporate subsidy. And so this report is so important. We hope the legislature will take action. In 2013, we sponsored AB 880, which was a fair share fee, and we encourage everyone to look at that. We look forward to working with you.

Thank you.

Thank you very much. Welcome.

Good morning, Chair and members. Moira Topp here on behalf of Biocom. The life sciences industry has consistently stepped up during tough fiscal times. And the R and D tax credit has either been suspended or capped in 2020, 2021, 2024, 2025, and currently today in 2026. We understand the need for temporary measures to deal with temporary fiscal situations.

The proposal before us, AB 122, is a permanent cap on the proposal. It sends a very strong message to our companies, to investors, and to competitor states and countries that compete for California's businesses to move there. It sends a very strong message. We would like you to reconsider the proposal, especially with respect to the permanency of the proposal. Thank you.

Thank you very much. Welcome.

Thank you, Chair, members. Nicholas Louizos on behalf of the California Association of Health Plans. We're in strong opposition to the MCO tax trailer bill. I want to thank the Senate for initially rejecting the proposal, but we're disappointed to find it on the agenda today.

I think policymakers should ask themselves whether it's the responsibility of individuals, working families, and small businesses in their districts to withstand a tax on their healthcare coverage that basically is going to serve as a general fund backfill and serve as a method of balancing the state budget in the out years.

And so this is a regressive tax. We understand that CMS has changed the rules on the states. This MCO tax has not been very popular with CMS all the way back starting with the Obama administration, through the Biden administration, and to this current one. But there's no requirement. You're at a minute.

You're at a minute. Thank you very much.

Okay. We urge you to reject it. Okay. Thank you.

Welcome. Good morning, Chair, members. Mark Farouk on behalf of the California Hospital Association. Related to the MCO tax proposal, we'll just echo the comments of the previous speaker. Also echo the comments made by the Senate Health Chair here today, her comments and questions.

We just want to note that California's hospitals are committed partners to strengthening the Medi-Cal system and improving access to care. To fulfill the promise made to voters through Proposition 35, implementation should remain focused on increasing resources to providers for patient care, preserving dedicated Medi-Cal investments, and addressing critical gaps in the healthcare delivery system. So we are opposed to the current MCO tax proposal. I would just make a note related to the software tax.

We did encourage that there be a carve out for healthcare providers, as we see tens of millions of dollars of additional costs related to the software tax for California's hospitals. California's hospitals have to use a variety of software in order to comply with California's data exchange framework requirements. Thank you.

Thank you very much. Welcome.

Good morning. I'm Angelica Gonzalez with Kaiser Permanente, opposed to the MCO tax proposal. I would like to align my comments with those of CAP and with the California Hospital Association, and only add that this proposal disproportionately impacts Kaiser Permanente as an organization. And we are committed to working with the legislature on any proposals that could help improve the situation here. So thank you.

Thank you very much. Welcome.

Good morning, Chair and members. Gabriela Chavez with United Domestic Workers AFSCME Local 3930, in strong support of AB 122 and AB 177. We appreciate your commitment to not balancing the budget on the backs of low-income Californians, and instead advancing a more equitable approach by requiring corporations to pay their fair share. We encourage you to adopt the Medi-Cal Fair Share regardless of any future federal actions affecting Medicaid.

Large employers should continue their fair share toward the healthcare system and should not rely on taxpayers to subsidize the healthcare costs for their workforce. Thank you.

Thank you very much. Welcome.

Mr. Chair and members, I'm Aaron Evans on behalf of the County of Santa Clara. The county supports the Medi-Cal Fair Share Act as part of the state's revenue solutions. We appreciate the state's partnership with counties like ours to really try to mitigate the disastrous impacts of HR 1 that we're facing. Thank you.

Thank you very much. Welcome.

Alexis Rodriguez with the California Chamber of Commerce. We're opposed to AB 122, specific to the sales and use tax on software, as well as the limitations on business tax credits. Implementing a tax on digital software will significantly increase the cost for California's businesses of all sizes. Additionally, implementing the permanent business tax credit limitations, we lose incentives that support research, innovation, and job creation in California.

In relation to AB 125, the MCO tax proposed will increase premiums for employers and working families, potentially putting them at risk of losing coverage.

And for those reasons, we are opposed. Lastly, we are opposed to the Medi-Cal Fair Share proposal in AB 177 at a time when affordability is a top concern, including healthcare affordability. We'd welcome collaboration with the employer community to strengthen employer-sponsored healthcare coverage options. Thank you.

Thank you very much.

Good morning, Chair and members. Jeissy Lee with the California Taxpayers Association, and on behalf of a broad coalition of taxpayers and industry associations opposed to AB 122, the tax on digital software and software as a service, and the limitation on tax credits. Limiting tax credits, we lose the R and D credit, a key driver of innovation, investment, and job creation, sending the wrong signal to employers making long-term location decisions.

Additionally, the proposed tax on digital software and SaaS would be one of the largest of its kind in US history, taxing the digital tools every business, big and small, relies on for business inputs, further driving up costs for consumers. Californians want greater affordability, and this policy delivers the opposite. For these reasons, we urge you to reject this bill. Thank you.

Thank you very much. Welcome.

Chair, members, Emily Doe with California's Credit Unions. We are opposed to the expansion of the sales tax on digital prewritten software. Not only would it be very costly, but also it only applies to state-chartered credit unions. And so we're worried that could weaken California's dual charter system and also encourage more credit unions to flip to the federal charter. Thank you.

Thank you very much. Welcome.

Good morning, committee chair and members. Yarelie Magallon on behalf of the Business Software Alliance, here today to voice our opposition to AB/SB 122, specifically the proposed software as a service tax. This is a major expansion of California's tax base that will increase costs for consumers, harm small businesses, undermine investment, and weaken the state's economic competitiveness. Thank you for the opportunity to voice our concerns.

Thank you very much. Welcome.

Thank you. Kris Rosa on behalf of the Information Technology Industry Council. We are opposed to the software tax for the many reasons already stated, as well as the injuries presented to the state's research and development ecosystem. Thank you.

Thank you. Welcome.

Hello. Marcus Prasad here. I'm a state worker for the California Department of Public Health. And I want to thank Mr. Archuleta for bringing this up. California is the fourth largest economy in the world, but we have the second highest poverty rate, tied with Louisiana, so something needs to be done here.

I'm here to support AB 177. I urge you all to support it too. It's time that we make corporations pay their fair share, and we redistribute that money back into the hands of the workers. Thank you.

Thank you very much. Welcome.

Sarah Bridges on behalf of the California Manufacturers and Technology Association. I represent a sector that is really struggling and trying to maintain a foothold here in the state. And whether it be the software tax or the fair share contribution, the MCO, we're trying to provide good quality jobs and ensure that they also have the benefits that they deserve, and make sure that we are providing affordable services and products to consumers.

And these types of taxes are going to make that much more difficult for the California consumer and for the worker. And so I urge you all to consider these proposals with that in mind.

And we urge your consideration of these proposals with that. Thank you.

Thank you very much. Welcome.

My name is Skyler Waldeck Myers, fiscal analyst for the Department of Corrections and Rehabilitation, here in Sacramento. And I just wanted to come here and support the corporate fair share portion of AB 177. And I would respectfully ask that you all vote in support of it as well. Thank you.

Thank you very much. Welcome.

Hello. My name is Benjamin Lester, and I'm a tax technician at the Franchise Tax Board. And I'm here to support the fair share contributions in AB 177 and the additional new corporate revenue proposals. I'm going to keep it short. Yeah.

Thank you very much. Welcome.

Good morning. Linda Nguy with Western Center on Law and Poverty. Appreciate the revenue conversation. Specifically, we support the employer fair share contribution plan that requires corporations to pay their fair share, as well as we support corporate tax credit limits that prevent people from losing their health and food benefits. Thank you.

Thank you very much.

This is Nicette Short on behalf of PEACH, the Alliance of Catholic Healthcare, and Adventist Health, in opposition to AB 122. The sales tax proposal reflects a new and direct cost to California's healthcare safety net providers at a time when we are already vulnerable and access to care is at risk. We urge you to reconsider this proposal with the patients and safety net providers in mind.

Thank you very much.

Hello. Angela Hill with the California Medical Association. CMA is respectfully opposed to the MCO tax proposal in AB 125. We share the concerns that were expressed today that the proposal is going to increase healthcare costs, including higher premiums for working California families and their employers. In the interest of time, I'll align my comments with our colleagues at CAP, Kaiser Permanente, and CMA. Thank you.