How will Newsom find $18B?

When Newsom unveils his last spending plan as governor Friday, he will do so with the spectre of a projected $18 billion deficit — the result of the state’s fast-growing spending, federal funding losses and heightened economic uncertainties under President Donald Trump’s administration.

The deficit could balloon to $35 billion annually in the next few years if state leaders don’t pursue long-term solutions, namely making sustainable revenue increases or cutting spending, according to the Legislative Analyst’s Office, the nonpartisan fiscal adviser to lawmakers. 

But neither will be appealing options to Newsom and legislative leaders this year. 

They have repeatedly resisted increasing taxes on average Californians and high-income earners alike — a politically dicey pitch to make in a state with high tax rates and increasing revenue. Spending cuts are equally painful to swallow, especially for Democrats running for reelection in November who have fought to expand services, such as Medi-Cal, that may now be rolled back. 

For Newsom, a lame-duck governor with presidential aspirations, there is even less incentive to address the state’s long-term budget health through major policy changes, political strategists say. 

“It’s not an uncommon occurrence in California for a departing governor to leave a note on the new governor’s desk that they’ve got a budget deficit,” longtime Democratic consultant Garry South said.

But how Newsom tackles the structural deficit will almost certainly have implications for his expected presidential bid. State Republicans, such as Assemblymember David Tangipa of Fresno, are already blaming the budget problem on Newsom’s mismanagement. “A Newsom presidency would be a fiscal and governance disaster of historic proportions,” Tangipa wrote in a December op-ed.

It’s the fourth consecutive year in Newsom’s tenure that the state is projecting a deficit even as revenue grows. In the past, state Democratic leaders resorted to temporary fixes such as internal borrowing, deferring payments, one-time cuts and drawing from California’s rainy day fund to avoid cutting into the social safety net. 

But that cushion is deflating: The state’s reserve stands at $14 billion, half its peak balance, after two years of withdrawals. State leaders have borrowed more than $20 billion from other state funds, debts that will come due in later years. Continuing to rely on those options would leave the state “undeniably less prepared” for an economic downturn, the LAO warned. 

“Eventually you are going to run out of Band-Aids,” Steve Maviglio, a Democratic strategist who worked for then-Gov. Gray Davis during a massive budget deficit, said. “(Newsom) has used every trick in the book, and after a certain point, there’s nothing left.”

More health care cuts to come?

Newsom has not indicated whether he’ll consider cuts to Medi-Cal, the state’s primary health insurance program for low-income residents. But as the state’s most expensive program, it is an attractive target. More than half of the $200 billion program’s funding comes from the federal government. 

Last year, as Newsom and legislators scrambled to close a $12 billion budget gap, they froze new Medi-Cal enrollment for undocumented immigrants, charged immigrant enrollees a $30 monthly premium and delayed cutting certain benefits. The cost of Medi-Cal has been rising faster than expected, forcing the state legislature to allocate $6.2 billion midyear to prevent a shortfall. 

The decision was contentious, with some health care advocates and Democratic lawmakers slamming their leaders for creating a “two-tiered health care system” that deemed immigrants less worthy of quality coverage. 

“That was an incredibly disappointing backslide,” said Amanda McAllister-Wallner, executive director of Health Access California, which advocates for universal health care.

This year, Trump’s budget reduced the federal government’s share of funding to Medi-Cal, requiring the state to pay more to provide the same benefits. California is projected to spend at least $1.3 billion more to implement that change, a figure that could reach $5 billion by fiscal year 2029-30, the LAO estimated.

Assemblymember Mia Bonta, an Oakland Democrat who chairs the Assembly Health Committee, said solving the state’s budget crunch shouldn’t come at the expense of health care.

“California needs its state and federal leaders to look for more innovative solutions to fill the gaps, make health care affordable, and keep our families healthy,” she said in a statement that did not offer specific alternatives. 

Any cuts to Medi-Cal could bring political consequences for Democrats who often pride themselves on expanding social services. Rolling back Medi-Cal could hurt Newsom’s legacy, too, since it was under him that the state began offering Medi-Cal to immigrants.

“Democrats are the party of expanding health care,” Maviglio said. “To slash it goes against everything they stand for.”

McAllister-Wallner acknowledged she isn’t optimistic about the budget outlook. But she said she hopes the state finds new revenue through taxing corporations instead of making cuts to vulnerable populations.

If “we are addressing this through cuts only, and cuts to the most vulnerable, that’s … not the leadership that we are looking for,” she said.

State leaders could also walk back some of last year’s funding commitments in other areas. While state lawmakers negotiated $500 million for homelessness to counties and delayed it until next year, it is not guaranteed. Newsom, who has blamed the state’s homelessness problem on local governments, could withhold the money. 

Newsom also promised last year he’d reach a deal with Bay Area transit advocates over state funding to save the area’s transit net from collapsing. But last month, in light of the budget shortfall, Newsom urged advocates to dip into previously allocated dollars to save the regional transit network, instead of a $750 million loan the advocates had requested.

Taxing the rich a nonstarter for Newsom

It’ll be hard to muster the political will in Sacramento to raise taxes. 

Former Assembly Speaker Anthony Rendon, a Los Angeles Democrat running for state superintendent of public instruction, said he’s long supported higher taxes on industries that have “skated away from taxation for a long time.” 

But even the most progressive Democrats in California have had little appetite to raise taxes, he said, because many represent affluent areas such as Silicon Valley where their wealthy donors live. 

Even when the state faced a projected $56 billion deficit over two years in 2023, Rendon said Democrats were “shrugging” at the problem and pointing to the state’s reserves as a solution, which he said reflected a culture of reliance on the rainy day fund.

This year, Newsom has already spoken out against a proposed labor-backed wealth tax ballot measure, consistent with his past opposition to similar proposals. 

The ballot measure, titled “The 2026 Billionaire Tax Act” and filed with the state attorney general’s office in October, seeks to tack a one-time 5% tax on those with a net worth of at least $1 billion and use the money to fund the state’s health care and education programs. The effort is led by the SEIU-UHW, a powerful labor union representing health care workers, and St. John’s Community Health, one of the largest nonprofit health care providers in Los Angeles County.

State. Sen. Roger Niello, a Roseville Republican and vice chair of the Senate Budget Committee, applauded Newsom’s opposition to the proposed tax increase. 

“To have a situation where we have developed an increasing deficit in the face of an economy that is not in recession, and revenues are increasing, it would seem to be silly to solve that by further increasing revenue,” he said. 

While taxing the rich is a popular Democratic talking point, backing a proposal like that could mean alienating the wealthy donors Newsom will likely rely on for his presidential run. 

There would also be no political gain for Newsom in his last year to stabilize the state’s progressive tax structure, which heavily relies on high-income earners, despite him promising to do so when he took office.

“He’s going to make more enemies doing it than he would not doing it,” Maviglio said.