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SACROMENTO – As stock markets plummeted last week, California Senator Robert Rivas sat at his desk at the Capitol and predicted that President Trump’s tariffs would “squeeze the economy at all levels.”
“This will certainly be the most challenging thing about our budget in my time in Congress. There will be some tough choices ahead.” “But again, at this point, it’s very difficult to navigate this issue due to so many uncertainties. Every day is different.”
Less than 48 hours later, Trump suspended most of the tariffs he imposed on imports. California’s progressive tax structure relies on shot-ups accordingly before bouncing back for the rest of the week.
Whiplash is underscoring the challenge this spring, in front of lawmakers and Gov. Gavin Newsom, as he seeks to develop this year’s state budget plan, which funds schools, healthcare, roads and other important services.
All state budgets are built on forecasts of state and federal economic conditions that will affect tax revenues over the next 12 months. California’s oversized reliance on income taxes is particularly vulnerable to the Wall Street boom and bust, as it is the top 1% of its earners, and its fate is often tied to the rewards it enjoys from the stock market.
Trump’s volatile trade policies and the threat of withholding federal funds from California, from public health funds to school support, has made predicted revenue even more volatile than usual.
Tariffs and physical retaliation from other countries have undoubtedly hurt California, from new charges on almond exports to contracting Silicon Valley technology stocks.
It predicts whether additional tariffs could take effect, when and when potential fallout will not depend on understanding US economic policies.
This poses a challenge for the Newsom administration, which is looking to develop economic forecasts for the budget year that begin in July. The estimates will serve as the basis for the revised state budget plan the governor will present to a democratically-led legislature next month.
Before negotiations on final spending plans begin, Rivas has already warned the passed budget when the June deadline may need to be significantly changed before it is postponed to the end of summer or before it is postponed to the fall.
“We’re excited to see the future of our efforts,” said Jerry Nickelsberg, senior economist at UCLA Anderson Prediction.
“It’s hard to predict, but the right way to approach this is to be more conservative than objective data tells you, as it predicts what the executive and legislative departments have to do.”
Trump has imposed 10% and 25% tariffs on automobiles and auto parts around the world. Confined to a trade war with China, he raised the tax rate on Chinese imports to 145%, and China raised US tariffs to 84%. Trump suspended additional tariffs on goods imported from other countries for 90 days, citing his desire to negotiate.
HD Palmer, a spokesman for the California Department of Treasury, said the tariff impacts remaining for international countries and China, California’s large trading partners, will be considered at least in the state’s updated economic forecast for 2025-26, as it is today.
However, it is difficult to build revenue forecasts on tariffs that may or may not be negotiated.
“We try to keep people waiting as long as possible as things change every day,” said Somgeta Mitra, chief economist at the Ministry of Finance. “That’s why we try to see as much information as possible.”
In Newsom’s first budget proposal, released in January, the governor flagged “uncertainty about federal policy” as “the most pressing risk to forecasts.” The state believes it will lose revenue from sales and use taxes, personal income taxes and corporate taxes.
The budget says Trump’s tariff proposal could raise prices for consumers and businesses on daily and essential products, which could lead to increased California inflation, lower spending and reduced sales tax revenue.
Palmer said the state is particularly vulnerable to declining stock markets. This is because the top 1% of income tax returners typically generate around 40% of all personal income taxes paid in California. Their income comes primarily from capital gains and stock market options, or bonuses paid based on stock performance.
“When the market is on track, they’re on track, and as a result, our revenue picture is on track,” Palmer said. “On the other hand, when the market is a tank and they don’t do that well, we don’t do that well.”
The US “magnificent seven” tech stocks belong to companies based primarily in California, such as Apple and Nvidia. The role these companies play in California’s revenues from capital gains is greater than in other parts of the country, making them more susceptible to a decline in the state’s stock market.
Mitra pointed out that California’s agricultural industry, particularly producers of almonds and pistachios, which supply most of the global market, could be hurt if other countries raise taxes on goods exported from the US in response to Trump’s tariffs. Ports in Los Angeles, Long Beach and Oakland will lose logistics jobs if global trade declines.
Tensions with other countries could reduce travel and tourism to California and affect hotels, theme parks and restaurants, Palmer said. China’s decision to reduce the number of US films released domestically this week will hurt major Hollywood studios.
Nickelsberg said uncertainty from Washington already affects California’s revenues, even before the tariffs were wiped out.
Stock market volatility tends to curb initial publicisation and exercises of stock options. Another source of capital gains, the housing market, is likely to be a hit if the economy is not confident, he said, as people are hesitant to buy a home.
The impact of tariffs is just one of the sources of potential financial problems for California from the Trump administration.
Since Trump took office, his administration has pose a threat to cut billions of federal funds from California, punishing the state for providing parental notices of student gender changes and diversity, equity and inclusion programs in schools.
Many attempts to cut funds significantly, including the administration’s efforts to cancel $200 million in federal funds for a post-pandemic academic recovery, continue to file lawsuits in court. That leaves California with another major budget uncertainty.
“California had to step up as the federal government pulled rugs out of every program, every social safety net,” said Congressman Isaac Bryan (D-Los Angeles) during floor discussions this week.
Republicans on the Capitol were quick to remind Democrats that not all California financial agendas are being created by Trump.
Congress passed the bill Thursday, and by the end of the current fiscal year, it appropriated an additional $11.1 billion to add state and federal funding to cover the cost overrun of Medi-Cal, a healthcare program for low-income Californians.
Most of the unexpected costs are due to increased health coverage for all immigrants, regardless of legal residency circumstances. Newsom has pledged to maintain the program this year, but it could be cut beyond next year’s budget and to the negotiation table.
Before the reductions and the impact of tariffs were considered, the governor’s January budget proposal had already relied on taking $7.1 billion from the rainy day fund to pay for the state program.
“Only in politics, you do poor work and try to blame someone else,” state Sen. Tony Strickland, R-Huntington Beach, said.
With the tariff threat lies on California’s budget and economy, the state should consider adopting policies to increase production and production and reduce dependence on foreign suppliers, Strickland said. He called for the province’s dependence on wood from Canada and for oil and gas from overseas.
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