Newsom outlines his final budget proposal with no deficit, new major spending

The state’s spending has grown more than $100 billion since 2020, according to legislative budget analysts.

“We’re cutting deficits. But we’re not cutting corners,” Newsom said.

Newsom can’t seek a third term and will leave office in January.

Revenues, driven mostly by the booming stock market and the artificial intelligence industry, are $16.5 billion higher than projections in January. That will help the state avoid a $2.9 billion deficit projected in January, guarantee no budget hole next year and cut the shortfall the following year in half, his office said. Newsom also wants to set aside $9.7 billion in a holding account to help balance future budgets.

California faced tens of billions of dollars in budget deficits several years in a row, forcing painful cuts last year such as a rollback on a promise to provide free healthcare to low-income immigrants without legal status. Nonpartisan budget analysts previously projected the state will see budget holes upward of $20 billion each year in the next few years. Newsom and the analysts sometimes differ in their estimations.

Still, Democrats are bracing for federal funding cuts in healthcare and the impacts of high costs on everything from gas to energy because of the war in Iran. State officials repeatedly have said California can't backfill all the federal dollars.

Republican lawmakers said Newsom's plan didn't go far enough to address future budget problems. Republicans are largely excluded from budget negotiations because Democrats have supermajorities in both chambers.

“Governor Newsom appears to define fiscal success narrowly: if the budget doesn’t collapse on his watch, it’s a balanced one,” Assemblymember David Tangipa said in a statement.

Newsom also blasted President Donald Trump and his policies, including in his budget presentation a photo depicting the president and Treasury Secretary Scott Bessent as characters in the movie “Dumb and Dumber.” Trump “doesn’t particularly give a damn about the financial situation of the average American," Newsom said.

The budget proposal will officially kick off the final stretch of negotiations between Newsom and Democrats in the Legislature, who have to pass a budget by the end of June.

State lawmakers this year are considering several proposals to increase taxes on corporations to help with budget problems. Newsom has largely avoided raising taxes to boost revenues in past years. Now, he wants to cut fees for new small businesses, limit some tax credits starting in 2027 and impose a sales tax on some digital software and cloud-based services.

The two tax measures could generate more than $1 billion the first year of implementation, according to the governor's estimation. Newsom is against a ballot initiative for a one-time tax on billionaires that will likely go before voters in November.

He also proposed to increase the monthly premiums for adult patients without legal status in the state-funded healthcare program, up to $50 from $30. The premiums were part of last year's budget and are set to take effect in July for adults under 60 years old. Democrats in the Senate already signaled they will fight the plan.

California has a progressive tax system that relies on rich people, meaning it gets about half its revenues from just 1% of the population. When the economy is good, rich people pay more in taxes and revenues can soar quickly. When the economy is bad, they pay less and revenues can drop just as fast.

The state could also see a revenue boost from expected upcoming initial public offerings by several major artificial intelligence companies, which are expected to be the largest IPOs in history. But legislative budget experts warned of a potential AI bubble that could worsen the state's finances.

Newsom’s Thursday proposal also includes a $300 million plan to backfill some of the loss of government-sponsored health subsidies, a $5 billion education grant for teacher training and $100 million to help Los Angeles-area homeowners rebuild after the devastating wildfires last year.