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The California Legislative Analysis Service reported Wednesday that Gov. Gavin Newsom and lawmakers could face a relatively small $2 billion budget deficit next year, but the outlook worsens in the future. He warned that it did not take into account changes brought about by the incoming Trump administration.
The Newsom administration agreed with the interim fiscal report’s key principles, saying the state “should expect greater uncertainty than usual.”
“Every budget in California can be affected by forces outside of our control, whether it’s a conflict overseas or the unpredictable stock market at home,” said a spokesperson for the Governor’s Treasury Department. HD Palmer said in a statement. “But this year we are learning more about the dramatic changes in federal policy next year under a new administration, and how policies like higher tariffs and changes to legal immigration will add additional costs, not just to California’s economy as a whole, but to us as well. There are further uncertainties that could affect the economy of the country as well.
The forecast, released by the Legislature’s bipartisan fiscal advisers, provides lawmakers with a preliminary analysis of what the state’s budget will look like through summer 2026. Newsom is expected to release his official deficit estimate during his budget presentation in January.
LAO said the state should be in a much better fiscal position heading into next year’s budget than it was earlier this year, when Democrats were forced to adjust a nearly $50 billion shortfall. Analysts attributed the impact to higher-than-expected tax revenues and previous measures to offset the deficit.
The forecast assumes the state will receive about $7 billion in tax revenue, more than expected in July. The balanced budget outlook for 2025-2026 also relies on $7 billion from the state’s rainy day fund, which Newsom and lawmakers previously agreed to and continues to limit corporate tax deductions and deductions. .
“This is driven largely by income growth for high-income taxpayers, who have benefited greatly from the very strong stock market trends we’ve seen so far,” said legislative analyst Gabriel Petek. said.
But Petek warned that revenues are not high enough for lawmakers to commit to new spending. The LAO expects the deficit to be around $20 billion in 2026-27, and a further deficit of around $30 billion in 2028-29.
Petek said California’s economy has gradually slowed over the past two years. New job creation is primarily in the government and health sectors, with the state reporting an approximately 25% increase in overall unemployment. He also pointed to a downward trend in personal consumption.
The passage of Proposition 35, which extends taxes on managed care plans, and Proposition 36, which increases penalties for some theft and drug crimes, is expected to increase costs to the state by about $3 billion by summer 2026. .
California also anticipates new costs associated with a $25 minimum wage increase for health care workers. LAO said its projections include increased costs for wildfire preparedness but do not take into account unforeseen disasters such as earthquakes or another pandemic.
“California must show restraint in this year’s budget as we must prepare for any challenge, including from Washington,” House Speaker Robert Rivas (D-Hollister) said in a statement. “Now is not the time to expand programs, but to protect and preserve services that truly benefit all Californians.”
State Sen. Roger Niero (R-Roseville) shares concerns about the threat of higher tariffs that Trump will impose when he takes office, both in his family’s auto dealership business and as a representative of a state that exports goods. He said that
He reminded Democrats that the California Republican Party can help bridge the gap with the Trump administration.
“Governors may want to remember that while Republicans are in the minority here, there are still many Republicans in state government who are equally concerned about the fiscal impact. ” said Niello. He talked about disaster relief and other topics.
“We have a lot of relationships with Congressional Republicans, not just within California, but outside of California. The president and the administration are Republicans, so we’ve made sure that to some extent they’re comfortable with the concerns that California Republicans might have.” I have no choice but to believe that they will do it.”
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