This story was originally published by CalMatters. Sign up for their newsletters.
Gov. Gavin Newsom today announced that California is facing a $12 billion budget deficit, spurred by an economic downturn and President Donald Trump’s chaotic tariffs strategy, forcing hard conversations about fiscal priorities with the state Legislature.
Newsom’s administration is now forecasting a $16 billion, or 4%, decline in tax revenues in his revised budget proposal. That plan is the opening salvo in negotiations with the Legislature, ahead of the start of the fiscal year in July.
“California is under assault, the United States of America in many respsects is under assault because we have a president that’s been reckless in terms of assaulting those growth engines and has created a climate of deep uncertainty,” he said. “The impacts are being felt disproportionately in the fourth-largest economy in the world.”
It’s a sharp turnaround from January, when Newsom projected a modest surplus in his $322 billion spending plan. A memo from the administration dubs the revenue shortfall the “Trump Slump.”
“We are seeing the slow-rolling impact of ‘Liberation Day’ and it’s not a good one,” spokesperson H.D. Palmer said. “Conditions have definitely changed for the worse since January, in significant part because of those federal tariffs.”
California’s financial picture was troubled even before the recent turmoil. Newsom and the Legislature took extraordinary steps last summer to close a budget gap projected in the tens of billions of dollars over two years, including by making sweeping cuts to state agencies and positions, clawing back funding increases for health care providers, eliminating affordable housing programs, delaying money for schools, suspending business tax credits and dipping into reserves.
And while tax revenues came in $6.8 billion above forecast through April, other problems were brewing.
A one-man ‘wrecking ball’ to California economy
Medi-Cal, the state’s health insurance program for low-income people, has reported a more than $6 billion cost overrun this year — in part because an expansion to include immigrants without legal status brought in more new enrollees than expected — and it needed an emergency cash infusion in March.
That program is targeted for one of the most significant overhauls in Newsom’s budget proposal: a freeze on new enrollment of undocumented adults and a $100 monthly premium for those that maintain their coverage, moves that the state estimates could eventually save more than $5 billion annually.
That program is targeted for one of the most significant overhauls in Newsom’s budget proposal: a freeze on new enrollment of undocumented adults and a $100 monthly premium for those that maintain their coverage, moves that the state estimates could eventually save more than $5 billion annually.
The devastating fires that hit Los Angeles in January also introduced new uncertainty for the budget, because the tax deadline for Los Angeles County — where a quarter of all Californians live — was delayed until October.
But the biggest risk is undoubtedly from Trump’s tariffs, which Newsom sued last month to block. Stock market declines are poised to take a bite out of future income tax revenue, because California relies disproportionately on capital gains earned by the wealthiest taxpayers; that accounts for $10 billion of the projected revenue decline. Higher costs from the tariffs are also imperiling major sectors such as manufacturing, agriculture, tourism and shipping in California, whose largest trading partner is China.
“It’s one person that is taking a wrecking ball to our economy,” state Senate President Pro Tem Mike McGuire, a Healdsburg Democrat, said last week during an event in Sacramento. “That is the existential threat to the state of California right now.”
“California is under assault, the United States of America in many respsects is under assault because we have a president that’s been reckless in terms of assaulting those growth engines and has created a climate of deep uncertainty.” — California Gov. Gavin Newsom
The grim outlook will almost certainly force more reductions to state programs, and legislative leaders will have their own ideas about what to target after Newsom puts forward his priorities today.
Bargaining will ramp up over the next month, with a June 15 deadline for the Legislature to pass a balanced budget or forgo its pay, though sometimes provisions of an overall deal drag out beyond that.
“Anyone who thinks we’re not going to make cuts this year is not in touch with reality,” Assemblymember Jesse Gabriel, an Encino Democrat who leads the Assembly budget committee, told CalMatters. “Advocates who are proposing major expansions of programs should stop wasting people’s time.”
One likely exception is a proposed $420 million annual increase of California’s film and television tax credit, more than doubling the pot of available subsidies and boosting the amount that individual productions can receive. It’s a priority for Newsom, with the strong backing of many Los Angeles-area legislators, especially as the region seeks a comeback after the fires.
Trump’s effort to slash federal spending is another looming question mark. Congressional Republicans have floated shifting more of the cost of social safety net programs to the states, though they are struggling to reach a budget agreement.
If they ultimately push through major changes to federal funding, lawmakers could be back in Sacramento later this year or early next year revising the state budget once again.
“Ninety percent of the ball game is in Washington,” Gabriel said. “It’s frustrating to me that this is beyond our control.”
Want more? Sign up to get Stocktonia delivered to your inbox three days a week.