Newsom Plays It Cautious Despite a Revenue Windfall
California is awash in unexpected tax dollars, fueled largely by a booming stock market and the state’s red-hot artificial intelligence sector. Yet rather than ramp up spending, Gov. Gavin Newsom is pumping the brakes — proposing fresh budget cuts and beefing up the state’s reserves to guard against what he believes is an inevitable downturn.
Unveiling his final budget as governor on Thursday, Newsom delivered a presentation laced with jabs at the Trump administration, including a meme depicting President Donald Trump and Treasury Secretary Scott Bessent as “Dumb and Dumber.” The message behind the theatrics was serious: the good times won’t last forever, and federal policy could deal the state a heavy blow.
A $350 Billion Plan Built to Outlast His Term
Newsom’s roughly $350 billion spending blueprint is designed to balance the books for two years and shrink longer-term deficits by half. Having promised not to hand his successor a massive structural shortfall, he framed the plan as a responsible exit.
“I’m not trying to get out of Dodge,” Newsom said. “This is a balanced budget structurally for the next 18 months after I’m gone.”
Even so, projections show the state facing a $10.3 billion deficit in fiscal year 2028-29 and $9.6 billion the following year.
Where the Cuts Land
The governor wants to trim general fund spending by $1.8 billion, with much of that coming from Medi-Cal. Key proposals include:
- Raising monthly premiums on undocumented adult immigrants by $20
- Reinstating Medi-Cal asset tests
- Moving roughly 1.3 million unauthorized immigrants enrolled in Medi-Cal into a separate fee-for-service program to protect federal funding
Stocking the Rainy Day Fund
While the state will still pull about $7 billion from reserves this year, Newsom’s plan rebuilds the cushion by transferring $3.6 billion next year and setting aside nearly $10 billion more for fiscal year 2027-28.
Why Newsom Isn’t Celebrating the Surge
Back in January, Newsom’s team projected a “modest shortfall” of $2.9 billion that could balloon to a $22 billion deficit by 2027-28. Since then, revenue has climbed faster than forecast, and the administration now expects $16.5 billion more over a three-year window.
But Newsom warned that the underlying picture remains shaky. He pointed to Trump’s federal spending plan — the president’s so-called “one, big beautiful bill” — which could cost 2 million low-income Californians their health coverage. He also blamed the conflict in Iran for pushing gas prices higher nationwide.
“We have a president who … doesn’t particularly give a damn about the financial situation of the average American,” Newsom said.
The Bubble Warning
The nonpartisan Legislative Analyst’s Office echoed the caution, suggesting the recent spike in tax collections signals the stock market is entering “bubble territory” that could head toward an “eventual bust.” Its advice: prepare for revenues that could fall tens of billions lower within one or two years.
Spending has also kept outpacing income. Since fiscal year 2019-20, state spending has jumped more than $100 billion, driven largely by expanding K-14 education, according to the LAO.
New Spending, Even Amid the Belt-Tightening
Despite urging restraint, Newsom carved out money for select priorities:
- $300 million to subsidize private healthcare for low- and middle-income residents
- Paid pregnancy leave for TK-12 and community college employees
- Halving filing fees for roughly 250,000 new businesses
A Likely Clash With Fellow Democrats
Parts of the plan put Newsom on a collision course with legislative Democrats, who prioritized protecting healthcare and education funding. Among the friction points:
- Limiting care for about 200,000 immigrants — including refugees, asylees and trafficking survivors — though now delayed until July 2027. Senate Democrats want full funding.
- Cuts to the in-home supportive services program, opposed by both parties.
- Rejecting requests for more spending on homelessness and on Proposition 36, the voter-approved measure increasing penalties for petty crimes.
The Tax Debate
Newsom avoided major tax hikes, frustrating progressives who have pushed to tax large corporations. Still, the self-described “small business guy” proposed permanently capping corporate tax credits at $5 million or 50% of a company’s tax liability — whichever is higher. He estimates this would raise $850 million next year and $1.7 billion the year after.
The California Chamber of Commerce opposes the move, arguing it would burden employers driving the revenue surge and likely raise costs for consumers. Meanwhile, Senate Democrats want large corporations with workers on Medi-Cal to pay up, a measure they say could generate $5 to $8 billion annually.
Common Ground
One area of agreement: both Newsom and lawmakers want to expand how much the state can save in its rainy day fund during strong years — a change requiring voter approval. Newsom wants the cap raised to 20% of general fund tax revenues, a buffer against California’s notoriously volatile, capital-gains-dependent tax system.
What Comes Next
Thursday’s presentation kicks off budget negotiations. Lawmakers have until June 30 to reach a deal with the governor before the new fiscal year begins.
Frequently Asked Questions
Why is Newsom cutting the budget if revenue is up?
He argues the surge — driven by tech and AI stocks — is temporary and could collapse, leaving the state with a long-term structural deficit. He also cites federal policies that could reduce funding.
How big is the proposed budget?
Roughly $350 billion, designed to balance the books for two years and cut longer-term deficits in half.
How does the plan affect undocumented immigrants?
About 1.3 million enrolled in Medi-Cal would shift to a separate fee-for-service program to protect federal funding, and undocumented adults would see monthly premiums rise by $20.
Are taxes going up?
Newsom avoided broad tax increases but proposed capping corporate tax credits, projected to raise $850 million next year.
When will the budget be finalized?
Lawmakers must reach an agreement with the governor by June 30, ahead of the new fiscal year.
Conclusion
Newsom’s final budget reflects a governor trying to balance optimism with caution — banking a windfall today to soften an expected slump tomorrow. By trimming spending, boosting reserves and resisting both major tax hikes and progressive spending demands, he’s betting that fiscal discipline will define his legacy. Whether lawmakers agree before the June 30 deadline will shape California’s financial path well beyond his time in office.