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California’s top AI and tech companies may be swimming in cash for now, but as skepticism grows about whether this AI boom will last or crash, so do concerns about the state budget and its dependence on the AI industry.
As CalMatters’ Levi Sumagasai explains, California’s largest source of revenue is the personal income tax. In addition to base salaries, many technology companies pay their employees stock options that, when fully vested and owned by employees, are treated as ordinary income for tax purposes. Companies pay withholding taxes on a portion of these earnings to the state and US governments.
Revenue paid in those taxes by some of the state’s largest technology companies is expected to make up about 10 percent of all income taxes withheld this year, according to the nonpartisan Legislative Analyst’s Office. With California facing a projected $18 billion deficit this year (more on that below), the state’s financial outlook is partly tied to these AI companies.
- Alamo HourLAO’s chief fiscal and policy analyst: “We’re seeing a real boost to income tax receipts because of this – for a relatively small number of employees. If the AI market deteriorates, we could see those withholdings go down.”
That’s because other aspects of California’s economy, such as job growth and wages, have stagnated or declined: In September, California’s unemployment rate rose to the highest level in the country, and from 2024 to 2025, the number of tech jobs in the Bay Area declined. Some tech companies, such as San Francisco-based Salesforce, cite AI as a reason they need to lay off employees.
- Jeff Bellisarioexecutive director of the Bay Area Council Economic Institute think tank: “The tech boom in the past has led to an employment boom. This doesn’t feel like it.”
CalMatters Events: On February 5, CalMatters’ Adriana Heldiz will host a panel to discuss trauma-informed care: how it can shape the future of education, what it takes to sustain it, and how policymakers can support more programs like it across the country. Register here to attend in person in Chula Vista or virtually.
Other stories you should know
Coming soon: Newsom’s latest budget
Speaking of the state budget, Gov. Gavin Newsom on Friday will unveil his preliminary spending plan for 2026-27 — his last as governor of California. With an $18 billion deficit projected for the fiscal year, how does Newsom plan to address the deficit? remarkable implications for his expected presidential bidwrites Yue Stella Yu of CalMatters.
The deficit is the result of escalating state spending, federal funding cuts and growing economic uncertainty under President Donald Trump. State Republicans and other critics of Newsom also blame the deficit Newsom’s mismanagement.
To fill the gap, state leaders could roll back some of last year’s funding commitments. Medi-Cal is also the most expensive program in California, although Newsom has not indicated whether he will target cuts. But as a lame-duck governor eyeing the presidency, Newsom would be even less willing to make major policy changes to address the state’s long-term budget problems, political strategists say.
- Gary Southlongtime Democratic consultant: “It’s not unusual in California for an outgoing governor to leave a note on the new governor’s desk saying there’s a budget deficit.”
Most Altadena residents are still displaced and still waiting for utilities
The utility company Southern California Edison has paid only 82 victims of the Eton fire through its wildfire compensation program, even though it has drawn almost 1,800 customers into the program, CalMatters’ Malena Carollo writes.
A year ago, the deadly wildfire killed 19 people and destroyed more than 9,000 buildings in Los Angeles County. For 80% of Altadena residents believed to still be displaced as of October. Although an official cause has not yet been determined, federal prosecutors cite defective Edison equipment for the fire.
To settle multiple lawsuits against the company, Edison launched a compensation program two months ago. Survivors criticized the program to exclude some residents, underpay others and require participants to waive their right to sue the company.
Edison offered a total of $34.4 million to settle 82 claims, with half of the claims being total losses and the others related to smoke and ash damage.
And finally: the battle over federal homeless funds
The Trump administration is trying to drastically reduce the amount of federal funds that can be spent on permanently housing homeless individuals. CalMatters’ Marissa Kendall and Director of Video Strategy Robert Meeks have a video segment why advocates say the move could force people out of housingas part of our partnership with PBS SoCal. Watch it here.
SoCalMatters airs at 5:58pm weekdays on PBS SoCal.
California voices
CalMatters columnist Dan Walters: As Newsom begins his final year as governor, California’s intractable problems not only serve as a potential obstacle to his presidential campaign, but also color the campaigns of his candidate heirs.
Attention is paid to the imprisoned firefighters during last year’s wildfires in the Los Angeles area showed that people want to see a second chance given to incarcerated people working to turn their lives around, writes Jose Angel Amezcuaa former incarcerated firefighter from Salinas.
Other things worth your time:
Hundreds of judges reject Trump’s mandatory retention policy, no end // A politician
ICE uses facial recognition technology to quickly arrest people // The Wall Street Journal
A battle looms over AI regulation in California despite Trump’s threats // Bloomberg
Five decisions that will change CA relationships with Trump in 2026 // San Francisco Chronicle
Providers Prepare for Medi-Cal Cuts: “We may not be able to serve everyone” // San Diego Union Tribune
CA teachers have the right to tell parents if their child might be LGBTQ+, federal judge decides // Los Angeles Times
Social workers are still reeling after the SF Ward 86 stabbing // KQED
Six Stories of Loss and Resiliencea year after the LA fires // LAist