On May 13, 2026, Governor Gavin Newsom released the annual “May Revise” for the state’s 2026-2027 budget outlook.
The May revision provides a more accurate revenue estimate than January’s initial budget proposal because it includes updated tax receipts from April. Recently, revenue forecasts have improved, with both the state Senate and Assembly citing a short-term revenue surge as a reason to avoid previously anticipated cuts, enabling the governor to state that the revised budget resolves the earlier projected deficits.
The revision process increased the "Big Three" General Fund revenue forecast by $16.5 billion above the projections in January. The Administration attributes this surge primarily to an $11.9 billion increase in cash receipts through April, driven by an unexpected spike in 2025 capital gains, particularly those from the tech sector and high valuations in artificial intelligence companies.
The $16.5 billion across the “Big Three” is broken down as follows:
- Personal Income Tax (PIT): Accounts for an approximate $13.6 billion increase tied directly to upgraded stock market outlooks and capital gains.
- Corporate Tax: Projected to decrease by roughly $1.6 billion over the window.
- Sales and Use Tax (SUT): Increased by approximately $244 million over the window.
The “new offer” extended by the governor will go through the legislative committee hearing process where both sides will negotiate a budget framework for lawmakers to vote on. Details will continue to be finalized thereafter through trailer bills, likely extending through the end of the legislative cycle.
The story in numbers:
Total 2026-2027 California state budget is $349 billion.
In the healthcare space, the budget for the Department of Health Care Services includes $223.2 billion ($45.7 billion General Fund) for 2026-2027 programs, including:
- Budget for the Medi-Cal program proposed at $194.4 billion ($48.6 billion General Fund) in 2025-2026 and $216.7 billion ($44.9 billion General Fund) in 2026-2027.
- Medi-Cal is projected to cover approximately 14.4 million Californians in 2025-2026 and 13.9 million in 2026-2027—more than one-third of the state’s population.
Another important factor in the state’s healthcare funding is the outlook for the Medical Care Organization (MCO) Tax. According to the governor’s official budget document:
“The May Revision reflects Managed Care Organization (MCO) Tax revenue of $4.5 billion in 2025-26 and $2.5 billion in 2026-27 to support the Medi-Cal program. The May Revision also includes $1.3 billion in 2025-26, $2.4 billion in 2026-27, and $150 million in 2027-28 to support increases in managed care and other payments relative to calendar year 2024, for hospital, community clinic, behavioral health, and other services for provider payments.”
This approach was heavily influenced by the changes imposed by HR 1, or the One Big Beautiful Bill passed in July 2024. Certain provisions will begin to go into effect January 1, 2027.
As stated on the governor’s official budget document:
“The existing MCO Tax expires on December 31, 2026. Proposition 35, approved by the voters in November 2024, requires that the state seek federal approval to continue an MCO Tax that complies with the structure of the existing MCO Tax and limits non-Medicaid tax liability of future taxes to $36 million annually. Recent federal changes pursuant to H.R. 1 prohibit taxes that assess higher tax rates on Medi-Cal plans than commercial plans, or otherwise place a disproportionately high tax burden on Medi-Cal plans. In order to align to the applicable law, the May Revision proposes to seek renewal of an MCO Tax effective January 1, 2027. The May Revision includes $575 million in 2026-27, $2.3 billion each in 2027-28 and 2028-29, and $1.7 billion in 2029-30 from this new tax to support the Medi-Cal program and maintain targeted rate increases for primary, maternal, and non-specialty mental health care implemented on January 1, 2024.”
Only time will tell how successful California will be at negotiating with the required federal entities to keep the MCO tax as an efficient source of revenue. The state will be on the hook address any remaining shortfalls. It is yet to be seen if the MCO tax revenue will be fully leveraged to improve physician reimbursement rates.
2026-2027 Full Budget Summary: https://ebudget.ca.gov/FullBudgetSummary.pdf
Gabriela Villanueva is CAP’s Government and External Affairs Analyst. Questions or comments related to this article should be directed to GVillanueva@CAPphysicians.com.