Newsom’s Final Year: $18 Billion Deficit Looms
The Budget Dilemma Facing California
In 2019, California’s first-year Governor Gavin Newsom inherited a state with a robust financial position. With a $21.4 billion budget surplus, he made significant investments in affordable housing, child care, and health care expansion while also reducing the state’s debt and building up reserves. However, the next governor will face a completely different fiscal landscape.
Newsom is set to unveil his final spending plan as governor, but it comes with the looming threat of an $18 billion deficit. This deficit stems from several factors, including rapid state spending growth, the loss of federal funding, and economic uncertainties under President Donald Trump’s administration. If no long-term solutions are implemented, the deficit could rise to $35 billion annually in the coming years, according to the Legislative Analyst’s Office (LAO), a nonpartisan fiscal advisor to lawmakers.
Despite these challenges, neither increasing taxes nor cutting spending seems like an appealing option for Newsom or legislative leaders this year. They have consistently resisted raising taxes on average Californians and high-income earners, which is politically challenging in a state already known for its high tax rates. Similarly, spending cuts are difficult to justify, especially for Democrats who are running for re-election and have worked to expand social services like Medi-Cal.
For Newsom, who is a lame-duck governor with presidential aspirations, there is even less incentive to tackle the state’s long-term budget issues through major policy changes. Political strategists suggest that he may be more focused on his future ambitions than on addressing the state’s financial problems.
“It’s not uncommon for a departing governor to leave a note on the new governor’s desk that they’ve got a budget deficit,” said Garry South, a longtime Democratic consultant.
However, how Newsom addresses the structural deficit could significantly impact his expected presidential bid. State Republicans, such as Assemblymember David Tangipa of Fresno, have already begun blaming the budget problem on Newsom’s mismanagement. “A Newsom presidency would be a fiscal and governance disaster of historic proportions,” Tangipa wrote in a December op-ed.
The Growing Deficit and Temporary Fixes
This is the fourth consecutive year in Newsom’s tenure where the state is projecting a deficit, even as revenue continues to grow. In the past, state Democratic leaders have relied on temporary fixes, such as internal borrowing, deferring payments, one-time cuts, and drawing from California’s rainy day fund to avoid cutting into the social safety net. However, these measures are becoming less effective.
The state’s reserve has dropped to $14 billion, half of its peak balance, after two years of withdrawals. Additionally, state leaders have borrowed more than $20 billion from other state funds, debts that will come due in later years. Continuing to rely on these options would leave the state “undeniably less prepared” for an economic downturn, warned the LAO.
“Eventually you are going to run out of Band-aids,” said Steve Maviglio, a Democratic strategist who worked for then-Gov. Gray Davis during a massive budget deficit. “(Newsom) has used every trick in the book, and after a certain point, there’s nothing left.”
Health Care Cuts Loom?
Newsom has not indicated whether he will consider cuts to Medi-Cal, the state’s primary health insurance program for low-income residents. However, as the most expensive program, it remains a potential target. More than half of the $200 billion program’s funding comes from the federal government.
Last year, as Newsom and legislators scrambled to close a $12 billion budget gap, they froze new Medi-Cal enrollment for undocumented immigrants, charged immigrant enrollees a $30 monthly premium, and delayed cutting certain benefits. The cost of Medi-Cal has been rising faster than expected, forcing the state Legislature to allocate $6.2 billion midyear to prevent a shortfall.
This decision was controversial, with some health care advocates and Democratic lawmakers criticizing their leaders for creating a “two-tiered health care system.” “That was an incredibly disappointing backslide,” said Amanda McAllister-Wallner, executive director of Health Access California.
This year, Trump’s budget reduced the federal government’s share of funding to Medi-Cal, requiring the state to pay more to provide the same benefits. California is projected to spend at least $1.3 billion more to implement that change, a figure that could reach $5 billion by fiscal year 2029-30, the LAO estimated.
Assemblymember Mia Bonta, an Oakland Democrat who chairs the Assembly Health Committee, said solving the state’s budget crunch shouldn’t come at the expense of health care. “California needs its state and federal leaders to look for more innovative solutions to fill the gaps, make health care affordable, and keep our families healthy,” she said in a statement that did not offer specific alternatives.
Any cuts to Medi-Cal could bring political consequences for Democrats who often pride themselves on expanding social services. Rolling back Medi-Cal could hurt Newsom’s legacy, too, since it was under him that the state began offering Medi-Cal to immigrants.
“Democrats are the party of expanding health care,” Maviglio said. “To slash it goes against everything they stand for.”
McAllister-Wallner acknowledged she isn’t optimistic about the budget outlook. But she said she hopes the state finds new revenue through taxing corporations instead of making cuts to vulnerable populations.
If “we are addressing this through cuts only, and cuts to the most vulnerable, that’s … not the leadership that we are looking for,” she said.
Taxing the Rich: A Nonstarter for Newsom
It’ll be hard to muster the political will in Sacramento to raise taxes. Former Assembly Speaker Anthony Rendon, a Los Angeles Democrat running for state superintendent of public instruction, said he’s long supported higher taxes on industries that have “skated away from taxation for a long time.”
But even the most progressive Democrats in California have had little appetite to raise taxes, he said, because many represent affluent areas such as Silicon Valley where their wealthy donors live.
Even when the state faced a projected $56 billion deficit over two years in 2023, Rendon said Democrats were “shrugging” at the problem and pointing to the state’s reserves as a solution, which he said reflected a culture of reliance on the rainy day fund.
This year, Newsom has already spoken out against a proposed labor-backed wealth tax ballot measure, consistent with his past opposition to similar proposals.
The ballot measure, titled “The 2026 Billionaire Tax Act” and filed with the state attorney general’s office in October, seeks to tack a one-time 5% tax on those with a net worth of at least $1 billion and use the money to fund the state’s health care and education programs. The effort is led by the SEIU-UHW, a powerful labor union representing health care workers, and St. John’s Community Health, one of the largest nonprofit health care providers in Los Angeles County.
State Sen. Roger Niello, a Roseville Republican and vice chair of the Senate Budget Committee, applauded Newsom’s opposition to the proposed tax increase.
“To have a situation where we have developed an increasing deficit in the face of an economy that is not in recession, and revenues are increasing, it would seem to be silly to solve that by further increasing revenue,” he said.
While taxing the rich is a popular Democratic talking point, backing a proposal like that could mean alienating the wealthy donors Newsom will likely rely on for his presidential run.
There would also be no political gain for Newsom in his last year to stabilize the state’s progressive tax structure, which heavily relies on high-income earners, despite him promising to do so when he took office.
“He’s going to make more enemies doing it than he would not doing it,” Maviglio said.
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