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

"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 artificial intelligence industry, are $16.5 billion higher than projections in January, according to Newsom's office. That will help the state avoid a $2.9 billion deficit Newsom projected in January, guarantee no budget hole next year and cut the shortfall the following year in half, his office said.

It is a welcoming change for the state where revenues have not kept up with spending. California faced tens of billions in budget deficits several years in a row, forcing painful cuts last year such as a rollback on a promise to provide free health to low-income immigrants without legal status. Nonpartisan budget analysts projected the state will see budget holes upward of $20 billion each year in the next few years.

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 said California can't backfill all the federal monies.

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 a super majority 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 used his presentation to blast President Donald Trump and his policies. Trump "doesn't particularly give a damn about the financial situation of the average American," Newsom said.

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

State lawmakers this year have pitched several proposals to increase taxes on corporations to help with budget problems, but Newsom has largely opposed the idea, arguing such proposals could drive businesses and wealthy people away. He has instead proposed to cut fees for new small businesses and limit some tax credits starting 2027. He is against a ballot initiative for a one-time tax on billionaires that will likely go before voters in November.

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 AI companies, which are expected to be the largest IPOs in history. But legislative budget experts warned last year 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.