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Gov. Gavin Newsom’s eighth and final state budget could be his most difficult, as he attempts to close a whopping deficit, offset reductions in federal funds and appease demands for more spending and new taxes.
While state revenues have been running a few billion dollars over projections of late, there’s still a multibillion-dollar gap between projected income and outgo, as Newsom faces a mid-May deadline for revising the initial 2026-27 budget he released in January.
The $349 billion January budget, which includes $248 billion in general fund spending, was admittedly a placeholder that sidestepped the larger issues.
The state has been running general fund deficits for the past four years totaling $125 billion, according to the Legislature’s budget advisor, Gabe Petek. Newsom and legislators papered them over with on- and off-the-books loans, accounting gimmicks, transfers from emergency funds and other time-dishonored tactics to put off the day of fiscal reckoning.
The administration’s own projections show a $23 billion gap between income and outgo for 2026-27 and similar gaps for the following two years if nothing is done. “Both our office and the administration expect the state to face multiyear deficits, with estimates ranging from $20 billion to $35 billion annually,” Petek says in his review.
The recent uptick in revenues would improve the numbers slightly, but not nearly enough to fully close what’s called a “structural deficit.”
Newsom has pledged to erase the current deficit and balance the state’s books after his departure, presumably for a presidential campaign, and renewed that intention during a recent meeting with Assembly Democrats.
“My obligation is to also have the back of the next governor and the next Legislature,” Newsom said, according to Politico, adding that he would do whatever is necessary, including spending reductions.
Newsom’s budget-cutting vow runs counter to his record. Over the past seven budgets, revenues increased by 60% while total spending jumped 72%, from $203 billion in 2019-20 to $349 billion in the most recently proposed budget.
Things began to go south in 2022 when Newsom boasted of a $97.5 billion surplus, saying “no other state in American history has ever experienced a surplus as large as this,” leading to a sharp increase in spending. The surplus turned out to be a mirage, based on a $165 billion error in revenue estimates over four years. The budget has been bleeding red ink ever since.
Newsom could close the chronic deficits by raising taxes, and that’s the preferred remedy for many legislators and interest groups, particularly unions.
For the past four months, advocates have waged campaigns for boosting the spending side of the ledger. School districts and their unions, for example, want Newsom to restore the budget’s $5.6 billion in deferred education support, while city officials want restoration of the state’s $1 billion annual support for homelessness relief, which Newsom’s budget cut in half.
Additionally, advocates for the poor want the state to fill gaps in health care and social services programs created by cuts in federal support by President Donald Trump and the Republican-controlled Congress.
A budget framework released by the state Senate’s Democratic majority endorses tax increases, specifically a payroll tax on large employers that would raise between $5 billion and $8 billion a year for health care.
Other tax increases are being floated, such as a change in how multinational corporations are taxed, and two union-backed tax measures will be on the November ballot, including a highly controversial wealth tax on the state’s billionaires.
Newsom has resisted tax increases, but faces what could be a Hobson’s choice of his own making – whether to launch his presidential campaign with California still facing deficits or after having increased taxes.
