Newsom’s tight budget faces a tough road in the California Legislature

from Dan WaltersCalMatters

This comment was originally posted by CalMatters. Sign up for their newsletters.

Since the turn of the century, California’s state budget has been plagued by a boom-and-bust syndrome rooted in its uneven revenue system and lack of political discipline.

The budget is becoming increasingly dependent on taxes paid by the state’s wealthiest residents, whose incomes increasingly come from investments rather than wages.

Such a state revenue will often jump up, only to level off or decrease. But governors and lawmakers will make new spending commitments during peaks that will become liabilities during downturns.

It was called “volatility” and that peaked four years ago when Gov. Gavin Newsom announced the state had a $97.5 billion surplus after deciding the post-pandemic revenue surge would be permanent.

His administration later admitted a $165 billion error in the four-year revenue forecast. But in the meantime, he and the Legislature had ramped up spending, creating deficits totaling $125 billion over four years, according to the Legislative Analyst’s Office. Deficits were covered up with a series of short-term fixes, including borrowing and accounting gimmicks.

On Thursday, Newsom revealed a revised version of his final budget and without saying it, indicated that he had learned a hard lesson about managing volatility.

Although the state is seeing another tax jump and its budget sees a revenue increase of $16.5 billion over three years, Newsom’s $349.4 billion budget for 2026-27 takes a cautious approach. He says this will not only erase the structural deficit of the past four years, but ensure his successor has a balanced budget for the first year of 2027-28.

“We’re cutting the deficits, but not the corners,” Newsom said.

The $246.6 billion general fund portion of the budget relies not only on new revenue, including a $3.6 billion boost from several relatively small tax increases, to balance it, but is indirectly helped by big cuts in federal health care aid.

Newsom devoted the first minutes of his budget presentation to bragging about California’s $4 trillion-plus economy, saying “we just don’t have any competitors.” He also trolled people with “California derangement syndrome” and denounced President Donald Trump as corrupt and incompetent.

However Trump’s tightening conditions for federally subsidized health care that could affect hundreds of thousands of Californians also has the effect of reducing state health care spending, thereby helping Newsom craft a balanced budget.

He could replace the lost federal funds, but that would likely require him to propose a significant tax increase of some kind, which, as likely candidate for president in 2028he is unwilling to do.

His stance on health care and taxes, however, puts Newsom at odds with advocates for the poor Californians who will be affected and their allies in the Legislature, many of whom want tax increases.

Graham Knauss, CEO of the California State Association of Counties, immediately declared that “the governor is proposing to do to the counties what he accuses the president of doing to California.”

Chris Hoene of the left-leaning California Center on Budget and Policy, which has been beating the drums for tax increases, said, “The governor has promoted California’s economic dominance while making it harder for low-income Californians to access health care by reinstating harmful Medi-Cal asset limits, expanding work requirements and increasing Medi-Cal premiums for certain immigrants.”

With just a few months left as governor, Newsom’s ability to bend the legislature to his will is fading, so the question his new budget poses is whether lawmakers will agree. Or will they insist that the new holes in the state’s safety net be plugged and support tax hikes to pay for it?

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.