Amid revenue surge, Newsom says his budget is balanced through July 2028
Gov. Gavin Newsom’s budget proposal closes the gap between the state’s spending and its revenues through July 2028. The preliminary pitch keeps Newsom’s promise not to leave his successor with a yawning structural deficit, according to a preview his office provided reporters ahead of his final budget proposal later Thursday morning.
Though the early points provided to the press are light on details, higher than expected revenues driven by the surging stocks of artificial intelligence companies allowed Newsom to cut California’s long-term deficit in half, at least according to his office. The governor’s plan achieves that reduction “without abandoning core services,” according to the handout. But it will also “slash the state’s ongoing spending.”
The governor proposes reducing general fund spending by $1.8 billion, according to the handout.
His budget includes significant investments in public education, as well as new funds to bolster wildfire recovery and insulate Californians from President Donald Trump and congressional Republicans cuts to healthcare subsidies. Where the cuts came from was not laid out in the handout.
What we know so far
Newsom’s preliminary January budget proposal kicked off an uproar from lawmakers who said the governor sought to balance the budget by paring back healthcare for the state’s immigrants, including both undocumented people and those legally present in the country through humanitarian visa programs. It remained unclear, in the first look at his revised budget proposal, where those cuts stood going into the next month of negotiations with lawmakers.
But the governor proposed a $300 million fund to insulate Californians from the expiration of Affordable Care Act tax subsidies that are spiking insurance premiums for lower income Americans.
According to the handout, Newsom’s proposal “will keep $0 monthly health plans available for lower-income Californians, expand financial help so more middle- and working-class families can afford coverage, and provide new state assistance for Californians earning up to 200% of the federal poverty level.”
Surprisingly, Newsom, who has sharply opposed a proposed ballot measure to tax billionaires and generally indicated an aversion to raising taxes, also intends to propose a limit on corporate tax credits.
Under his plan, California would limit some tax credits to either $5 million or 50% of a company’s tax liability, depending on which represented a higher share of the entity’s tax bill. The early look did not specify which tax credits would be limited or indicate how much revenue the caps would generate the state.
Two significant corporate tax proposals have gained momentum with lawmakers this year. One would collect billions of dollars more in revenue from multinational companies proponents say offshore much of their profits to avoid sales taxes in California. The other imposes a fee on mega corporations whose employees rely on Medi-Cal for health insurance.
Newsom is pairing his tax credit cap with a cut to the taxes and fees new small businesses must pay the state, according to the handout.
His budget proposal also includes a $100 million fund to provide low-interest loans for people rebuilding after wildfires when home insurance falls short.
Newsom also proposed several major public education investments. The budget proposal includes measures to put $5 billion into a discretionary block grant program that teacher training and student support, and increases special education funding by 43%, or $2.4 billion, according to the handout. There is also a $500 million investment in literacy coaches and math support staff at struggling schools.
Without a look at the complete budget, it remains unclear how Newsom will pump such funding into public schools while closing the deficit in the short term and cutting into it for the long run.
Lawmakers are waiting to weigh the governor’s complete proposal. The budget bill must pass by midnight on June 15.
How we got here and the Legislature’s proposals
Lawmakers began the legislative session in January with two drastically different assessments of the deficit. The Legislative Analyst’s Office predicted the state would be $18 billion short and the governor’s office predicted a $2.9 billion shortfall. The LAO built into its estimate that the state would experience a stock market downturn, the likes of which has not materialized, although the office continues to warn it is likely.
For weeks, state and legislative officials have highlighted the surging revenues, which an LAO estimate found were $25 billion higher than what Newsom had forecasted in January. Financial experts have attributed the surge to stock market enthusiasm around artificial intelligence and its related infrastructure.
Last month, the state Senate outlined their budget framework, which called for building up reserves and resisting the governor’s proposed cuts to some education, homelessness assistance and home health service programs. They also proposed delaying premiums and cuts to dental programs for undocumented immigrants.
The Assembly echoed the Senate’s reluctance to make cuts to safety net programs. But it didn’t join with the Senate in their call for a “Fair Share Contribution,” a tax on large corporations that have a high proportion of workers on Medi-Cal, California’s Medicaid.
One of the largest unknowns has been the federal government. President Donald Trump’s “One Big Beautiful Bill Act,” or House Resolution 1, signed last July, changed the rules on healthcare, altering everything from how states fund Medicaid to who qualifies for coverage. Advocates have called for the state to backfill many of the cuts.
The question of whether or not the federal government will continue to hold assistance back from California remains. On Wednesday, Vice President JD Vance announced the Trump administration would be withholding $1.3 billion in Medicaid assistance from California due to the state not doing enough to combat fraud.
Newsom’s press office said in tweets that the federal government has refused to work with the state on the issue. The state has taken action to address fraud in recent years, most recently with an action by Attorney General Rob Bonta to charge 21 people with $267 million in hospice fraud.
Bonta has had previous success suing to stop the Trump administration’s freezes to state funding. The attorney general did not immediately indicate whether he’d be taking the White House to court over the $1.3 billion Vance on Wednesday said the federal government would hold back.
