The Illegal Medicaid Tax of California

California politicians and interest groups have been working overtime to solve out a way to fix an illegal Medicaid provider tax—the title of my latest Mercatus Center study. These taxes are problematic because they are normally accompanied with the guarantee of increased Medicaid payments to the contributors paying the tax—payments highly financed with federal matching funds. As an outcome, contributor taxes, which reek of government favoritism because of how the benefits usually target select contributors, raise Medicaid spending.

California’s tax is illegal under federal law because the state was holding various insurers harmless from the tax that should not have been. The state has recently come up with a revised tax policy that it is submitting for federal approval. California Governor Jerry Brown has called the latest plan “extremely complex,” and recommended that he does not need to disclose the details, remarking that “very few people understand it, so I am not going to try to elaborate it to you because I could not explain it to you if I wanted to.”